merkhet

Again, I know I sound like a broken tape at this point, but with the scathing Sweeney order to unseal the seven documents, the pending motion to compel in front of Sweeney, the pending Perry decision & the fact that they, stupidly, tried to consolidate cases through the MDL in DC without waiting to see who the judges were in DC... I can't imagine that the government isn't looking at a settlement.

Yea, I'm agree with you that they're unlikely to view 4617(f) as a judicial bar (or, in my terms, jurisdictional stripping). And yes, it would have persuasive/binding effect on other cases. Should be able to see them -- or at least redacted versions eventually. Which symbols? FNMA & FMCC are the common. FNMAS is Series S preferreds for Fannie. There's a list way earlier on in the thread somewhere.

sorry, one more point. ginsburg and olson have an exchange that i think is on point. ginsburg points out that lamberth stated that conservator motivation doesnt apply (meaning lamberth's interpretation of anti-inj bar means that courts may not inquire as to motivation), but G goes on to say that we (meaning he and olson) have come up with two instances where motivation is relevant. this would auger for at least more fact finding. and if motivation is relevant, then what the anti-inj bar must mean (at the least) is not that courts cant review and enjoin, but that they can review and enjoin only for some reason. I think you're overcomplicating it. Recall that Millett's line of questioning is geared towards the same Q as Ginsburg. Does motivation matter? If we were to have the worst case scenario, what does that mean? What if there was an innocuous reason? Those were both Millett's questions (to Stern and Olson, respectively), and they completely mirror Ginsburg's exchange at the end of Olson's opening arguments. Let me phrase your question in a different way. The question is not necessarily "does the anti-injunction bar apply?" but rather "what does 4617(f) say?" And I think Ginsburg's view is necessarily that it is not a jurisdiction stripping provision because motivation is relevant. I think, too, that Millett is exploring that option but I'm unclear on where she settled. Brown's clarifying remarks that appellants view this as an ultra vires application of FHFA powers likely reveals her preference as well. Anyhow, that's why I think the bear case is a remand for a full trial w/ the production of the full and complete administrative record. I also agree that Ginsburg is trying hard to find a way to invalidate the NWS as a step beyond the FHFA's powers, but he might back off if Millett feels particularly strongly about it. We'll see. As for the implications of viewing 4617(f) as a remedies provision versus a jurisdiction stripping provision, I think that would have very interesting ramifications for the other cases. Not the LEAST of which is that the MDL is trying to consolidate all the cases in the federal courts of D.C. Well, consider the following -- if we get a favorable ruling in terms of 4617(f) not being a jurisdictional bar, then all the plaintiffs in those cases should immediately drop their objection to consolidation! So the big question now is -- does the Perry appeals decision come before or after May 26th?

Yes, and that has the possibility to be worse? There are multiple forms of equitable relief other than recession -- but let's assume that recession is the only one. In that case, wouldn't you have to contend with the 4617(f) bar? You'd have to decide whether breaching your fiduciary duty was an allowable thing under conservatorship, and if it was, then you'd have no remedy because your remedy isn't monetary? Alternatively, recession is not the only remedy under equitable doctrine, and, as a result, you'd have to consider monetary damages. Then you're in the woods because your par value is useless, and I haven't the faintest idea how to calculate those damages. Breach of K for the junior preferreds is just easier and cleaner.

If you read the article, it's easy to see why. Taibbi hates the big banks, and it's the big banks that are trying to expropriate the GSEs' business.

I think they're just quoting Sweeney's order un-sealing the seven documents for the Perry oral arguments.

But you personally prefer Fannie prefs vs Freddie prefs because of some (minor?) legal differences (different state law?)? Edit: I understand that what you wrote was for single company prefs only, I am not implying that you said that different company prefs are legally the same. I am personally in Fannie junior preferreds versus Freddie junior preferreds because I have a better sense of how Delaware corporate law plays out and a not so good sense of how Virginia corporate law plays out. My intuition is that the differences probably aren't material, but, to the extent that there is a difference, it would break in favor of Delaware corporate law. And yes, that's right. Each junior preferred is pari passu within its individual entity cap structure. I am literally batting 0.00 in terms of figuring out my timing, so my answer is that my gut instinct is that my gut instinct is probably going to be wrong. Bayes Theorem FTW.

To the lawyers in the forum, please. Could judges -after briefs- reach the conclusion that a discretionary action by the regulator (supervisory discretionary action, as per J. Ginsburg) worked against applicable laws (conservatorship)? Then, judicial review is granted and possible enjoining of Lockhardt's action. The judges can reach whatever conclusion that they want -- but if the reason 4623 is important is that if they reach the conclusion that suspending capital classifications means that shareholders cannot argue what is and is not safe and sound, then that's bad for the shareholders. Of course, as @doughishere immediately pointed out, just a few months ago, Mel Watt publicly mentioned the lack of capital in the Enterprises as making them very risky -- which would be a very strange thing to say if the suspension of the capital classifications made the Enterprises safe and sound. The different versions of the junior preferreds have different economic properties (interest rates, etc.), but they are legally pari passu.

Not necessarily. It's certainly easier to establish valuation in a liquidation scenario given that the junior preferreds have a par amount that means something. However, there is also some concern on my part that any settlement that involved converting the junior preferred over to common stock would involve significant dilution -- but yes, primarily it's downside protection. we are all in speculation land here, but when you realize that IF govt were to settle, they would want to get repaid their senior preferred and maximize the value of their commons stock warrants. so forcing conversion of junior pref at less than par would be in govt's interest Sure, but it takes two to tango, and you'd need to get junior pref to agree to such a settlement, which seems unlikely. Between the pref and the common, I suspect that the pref is the fulcrum security.

+1

The supplemental briefing is on 4623

Delaware law is more established than Virginia law re various corporate rights. Assessing that is just a function of knowing general corporate law. I don't really know how to get more granular than that. It's not like I did a review of hundreds of years of case law in both states or anything. Although, my guess is that it'd be easier to do that for VA law because the VA case law is likely pretty light. That's true that DE is more established but I was just concerned about a (very unlikely) scenario in which a judge in Virginia rules in favor of us and one in Delaware for the govt. Like if we get a Lamberth type character in DE and Gingsburg/Brown type in VA. I think that would be highly unlikely -- not the least because most cases that are suing both companies are being brought before a single judge? So that same judge would have to rule separately based on the case law of each of the states. Unlikely unless they find that one state has some version of relief that doesn't exist in the other one. And were that the case, my guess is that the place that wouldn't have relief would be Virginia.

Delaware law is more established than Virginia law re various corporate rights. Assessing that is just a function of knowing general corporate law. I don't really know how to get more granular than that. It's not like I did a review of hundreds of years of case law in both states or anything. Although, my guess is that it'd be easier to do that for VA law because the VA case law is likely pretty light. I don't think so, but Millett was asking about that during Olson's time. Chicken & egg problem. Of course, assuming that you can't ask for the full administrative record because of 4617(f) would swallow the idea that there was anything that wasn't within the purview of HERA because... well, how would you enforce it?

Not necessarily. It's certainly easier to establish valuation in a liquidation scenario given that the junior preferreds have a par amount that means something. However, there is also some concern on my part that any settlement that involved converting the junior preferred over to common stock would involve significant dilution -- but yes, primarily it's downside protection.

I have no allocation to common. 100% of my allocation is in the Fannie Mae preferreds.

i bet he doesnt respond, but that does not mean he doesnt pass it on internally Who knows. Took me five minutes to put my notes together, so it's a small cost on my part. Plus, Judge Steele responds, so I figured why not? :) To the other people reading this, please do not also send Olson a note. Hypocritical, I know, but I would rather he not get a deluge of emails given that they've only got 7 days until they have to file their supplemental brief.

I shot Olson a note just now with some thoughts on 4623. He's an old friend of a professor of mine from law school, and we met years ago. We'll see if Olson responds. :)

I think he realizes that supplementation of the administrative record is the easiest thing to get, but we'll see if the shell game argument has any resonance. The more I think about the rebuttal, the more impressed I am with how he did.

From what I gather, you mean base case is a win for the prefs, and bull case is win for prefs+commons? It's not that cut and dry, but that's the gist of it. A breach of K claim, IMO, is easier to find in the junior preferreds than in the common. I know what my liquidation amount is on my junior preferred: par. What's the liquidation amount on the common? ¯\_(ツ)_/¯

Hasn't there been chatter from like Watt on that? Yes, though it's unclear whether you can enter Watt's recent comments into this portion of the proceedings.

Haha. How did you know that reviewing my notes and thinking through my analysis was the first thing I was doing this morning? Yes, I still agree with my initial assessment of winner winner chicken dinner. I think the breach of K claim is still the easiest for the judges to resolve as there seems to be no real disagreement that the claims are direct and not barred by either of the statutory limitations of 4617(f) or 4623. Moreover, my read of the judges is that Ginsburg very seriously believes the appellants' claim that the Treasury & Administration made a decision in 2011 to kill the companies, and if they did that, they should have announced that they were being a receiver. Since they didn't do that, Ginsburg, IMO, believes they are trying to do an end run around the statutory protections granted to shareholders during a receivership -- ergo, breach of K. The other route, of course, is to declare a violation of the APA. Now, this has become slightly trickier because the purpose of the 4623 discussion is to decide on what grounds the appellants can prove that the company is not being run in a safe & sound or rehabilitated manner. If the conservator can decide by fiat the capital classification of the company, then it's possible that there's no way to make a determination on the soundness of the company that differs from that. (Caveats being that they'd have to produce a record, etc.) Mainly, I think Ginsburg pressed them on whether it was a discretionary supervisory action because it would further any request for a complete administrative record -- as there is currently nothing in the record supporting the idea that FHFA made a discretionary supervisory decision to substitute real capital for Treasury's letter of credit. Moreover, I'm not sure that running a company completely on debt (w/ no equity) isn't on its face absurd -- particularly a financial company, but that is maybe a little too complicated a leap to make for three judges that have no finance background. The other part, of course, is Ginsburg's declaratory statement that he sees the conservator and receiver distinction as being much more separate than the government does. If, as I believe, his view of the fact pattern is that the government decided to be a receiver and call itself a conservator, then I think there are clear grounds for Ginsburg to make a determination that the government has made a grave error in overstepping its bounds as a conservator. This dovetails nicely with Millett's repeated questions to Olson earlier re "well, is the only issue here that they failed to give you notice that they were being a receiver?" (Perhaps this was something the judges discussed amongst themselves prior to oral arguments.) Moreover, Olson, bless his heart, by dint of his friendship with Judge Ginsburg almost certainly picked up on Ginsburg's leaning during the Stern discussion and that's why he came at the idea of a shell game during his rebuttal. Very, very clever, as I think Olson knows which buttons to push for Ginsburg. Anyway, tl;dr, winner winner chicken dinner. At the very least, I think we get a remand for a complete administrative record. Base case, I think we win on breach of K. Bull case, I think we win on APA.

I think there are two responses to this -- (1) well, you didn't give us a record nor are you able to provide one post hoc, and (2) how many legs does a dog have if you call its tail a leg? four. calling a tail a leg does not make it so -- ergo, suspending the capital requirements is NOT the same as making a determination as to whether the companies are safe and sound Yes, actually, I have read four books by Paul Ekman, the person on whom that show is based. They're quite good, and I would highly recommend the one he co-wrote with the Dalai Lama. I had a similar thought today that this is why we have bankruptcy courts. You need judges with experience understanding finance for cases similar to this, but I think the judges will arrive at the correct judgment here -- seems like the easiest method for the judges to rule, upon my second run through of the oral arguments, is to grant some relief through the breach of K claims, which are direct and don't at all impact any additional discovery, etc. (Also, seemingly not barred by either 4617(f) or 4623 but maybe I'm missing something there.) And on that note, it's past midnight, so I'm turning in!

Olson's rebuttal comes back strong by mentioning that (1) FHFA & Treasury have worked together, a violation of the statute, because FHFA is supposed to be a fiduciary versus Treasury having a different interest w.r.t. taking care of taxpayers (throwing in a mention that the record is incomplete and a complete record would probably provide more evidence), (2) FHFA said that stockholders would retain residual rights to economic value AND that in that same Q&A, FHFA said specifically that the conservator cannot liquidate the company. Olson says this is a shell game by basically calling itself a conservator but acting as a receiver at the same time. He also throws out the idea that the supervising sponsor of the appropriations bill didn't ratify the Jump Start bill (basically disavowed it?). Olson also throws out a citation to the Samuels case where FHFA says that the companies are net worth insolvent. Finally, Olson mentions again that the record is incomplete, and they are entitled to getting one -- even though what little they already have probably shows that the conservators are violating their statutory duty. Hume's rebuttal was also strong. Hume clarifies that the shareholders have fewer rights under receivership than under conservatorship mentioning again Lockhart's statement that shareholders retain all economic rights. Millett asks if those rights changed at all in the first two amendments, and Hume says no. They were only extinguished in the third amendment. He also ties in the idea that Treasury's consent on dividends going out is no different than the board of directors announcing a dividend given that Treasury controlled the entities via 80% ownership and/or working w/ FHFA. Hume also points to a piece of evidence that is not public which indicates that the PCF value was very small (Exhibit 34). Hume then mentions that appellees now say that the appellants have right to no direct claims, and he mentions that zero courts have ever read statutes that way. Millett asks a few clarifying questions on which claims were direct, and Ginsburg actually answers on Hume's behalf that the direct claims come from the stock certificates. Millett seems to agree with that. Very strong argument at the end that FHFA admits that stockholders have economic rights (thank you Director Lockhart!) but to then say that shareholders can't come into court and protect them raises serious constitutional doubt issues. (i.e. if HERA is read this way, there is a serious challenge as to whether the act is constitutional)

Mark Stern (not Dintzer), as mentioned before, starts off by telling the story of how the world was ending in 2008, so Congress provided very broad powers via HERA despite having taken the language from FIRREA. There is an exchange where Stern mentions that the companies were failing, and Ginsburg mentions that there was some disagreement whether the companies were failing, and Stern mentions that he's talking about 2008. Stern mentions again the imprimatur of approval given by the Jump Start bill, but Ginsburg interjects and asks whether, if the plaintiffs get the relief they're requesting, Treasury would have to sell shares. Stern backs off and demurs. Ginsburg then says "Congress acts by enacting a statute, and Mr. Cayne and you both seem to want to avoid discussing the terms of the statute in any detail, and viewing this from 30,000 feet and looking at the purpose in 2008 and so on but we have to grapple with the terms of the statute." Millett asks "why wouldn't it be ultra vires to say that the one thing we know that the conservator can't do is to adopt a plan by which the regulated entities can never become solvent?" i.e. This doesn't implicate 4617(f). Stern double downs on the idea that there hasn't been a liquidation because the companies are still running. He then goes on and says that there were no good answers on how to proceed with the GSEs, and that they need legislation to wrap things up. Basically saying that this is within FHFA's judgment on how to choose between a bunch of bad choices -- mentioning again the idea of a death spiral. Stern then mentions that we don't get to fight about what was the best choice for the conservator to make, and he says that there were no specific statutory prohibitions that they stepped over the line on. Ginsburg interjects that there are, in fact, limitations by saying that the conservators are supposed to act as necessary and appropriate to conserve and throws in that the government produced an incomplete record. Stern (stupidly, IMO) takes issue with the idea that the record was incomplete, and Ginsburg retorts that new things have come out that show that the record was, in fact, incomplete! There were things that weren't submitted initially. Stern's response was that they opposed the supplement of that record, which seems (to me) not a great response because that's saying that the record was incomplete but... well, we didn't want you to see that. So they go back and forth a bit on whether the administrative record was adequate in this case. Millett says to assume the worst administrative record possible -- like, the administrative record says that we should take all the money now that it's profitable -- could a conservator do that? Stern's response is that a conservator could do that and that nothing that has been produced supports that fact pattern. (Specific choice of words, IMO.) Ginsburg says, though, that the administration said in 2011 that the GSEs should be wound down, and the NWS is the way to do it. However, they specifically decided not to pull the receivership trigger because they didn't want to deal with the liquidation preference. This is where Stern says that the conservator is allowed to wind down, and Ginsburg pushes back and says that's not how he reads 4617(A)(2) because the word "respectively" is implicit in that section. At the same time, another judge starts to say something, but she doesn't actually get any words out. Would be nice to know which judge and what she was going to say. Ginsburg then has his great quote about killing the GSEs and salting the earth. :) Ginsburg mentions re their choices, "I think they had two alternatives. They could act as a conservator, which they didn't want to do. Or to act as a receiver and move towards liquidation." Millett asks again about whether there is fluidity between conservatorship and receivership, and Millett follows up by asking how we would be able to tell when winding up stops and liquidation begins. Ginsburg then asks about the direct claims (breach of K, implied covenant, etc.) and seems unconvinced with Stern's argument that the succession clause takes those from shareholders. Ginsburg then says that the liquidation claim is not a derivative claim -- agreeing w/ Hume, essentially. Seems to have made up his mind on that one. Millett seems to argue that the claim seems derivative, but Ginsburg then disagrees because the liquidation preference doesn't accrue to the companies, it accrues to shareholders directly. Stern then goes with the argument that shareholders' liquidation preferences haven't been taken away by saying that "what they've got, they've got." Ginsburg then says, "well, what've they got?" Then everyone laughs. Stern hems and haws and says "They've got a lot more than what they would have had without these deals." (Again, notably wrong! But I suspect the laughing showed that.)

So it looks like the court gave notice to the parties earlier today that there might be a different statutory bar via 4623, which is why they spent so much time discussing it with Howard Cayne this morning and why they want to have supplemental briefing on 4623. https://www.law.cornell.edu/uscode/text/12/4623 As far as I can tell, the argument from the government is that Plaintiffs can't say that the entities are being operated in an unsafe and unsound manner based upon a lack of capital, because the amount of capital required for the GSEs is determined by the FHFA director, which is not reviewable except through 4623. Moreover, the regulator made the regulatory decision to have Treasury's "line of credit" satisfy capital standards -- and that too is not reviewable. It's a clever argument. Millett is noticeably softer on Cayne than she was on Olson, even though she makes the appellant argument to Cayne that this doesn't look like what a conservator is supposed to do and that the GSEs are effectively in this weird limbo situation. Cayne then says that the statutory powers of receivers and conservators are identical but that the receiver has some additional powers later on in the statute. Cayne also brings up the Jump Start bill as saying that they're condoning what Treasury & FHFA did with the Third Amendment by telling Treasury to stay in a holding pattern until 2018. Millett also questions whether Jump Start affects any remedy that might be asked for in this case. Cayne hems and haws a little bit but says that this suggests that Jump Start bars the court from making any change to the attributes of the shares held by Treasury. (Notably, not true -- even Corker said so on CNBC that very day that it wouldn't affect any legal judgment or settlement.) Millett seems unconvinced about it, but it's hard to tell if Cayne was able to put one over on her. Cayne then talks about how there was consideration by exchanging the Periodic Commitment Fee for the Net Worth Sweep. Millett asks how much the PCF would have been, and Cayne responds that the PCF has never been determined. She then asks again whether anyone has any sense of what that would have been worth, and Cayne says that Congress thought it was enough to pass special legislation concerning it. Cayne brings up the idea that maybe this was a bad deal, but this is not an APA case under any arbitrary and capricious standard. The only issue is whether the conservator exercised a power granted by Congress -- which was the power to operate the institutions and enter into contracts. Brown interjects that the issue is whether the power that FHFA was exercising was ultra vires or whether that was the power actually authorized by the statute. Ginsburg then mentions his question about whether there had been a discretionary supervisory action or a reclassification of the capital structure re 4623. And so Cayne basically says that the director didn't make a change within the reclassification grid but rather moved off that grid. Ginsburg then said that if it's not a change within the grid, then it's a discretionary supervisory action -- then Cayne agrees. Millett mentions the idea of submitting supplemental briefs.