merkhet

Move to Canada. Canada has the worst government since inception. In the poll! How do you change your vote in the thread's poll... I understood that you asked about the poll, but since this thread is ::) :o ::) anyway, I thought it was funny to point you in the right direction. I mean in the northern direction. :P Edit: no, poll votes for this poll are not changeable. Probably the author did not actually allow it. Haha. Yes, I know. It's hard to see the faux exasperation in my comment over the interwebs!

Man, my degrees are paying off some today. Two things. (1) One of my former mentees from law school responded to my inquiry about the MDL. He's done some work concerning the MDL before, and he says that while he hasn't encountered the specific question of whether cases are stayed pending the MDL decision, there is no automatic stay. Now, of course, Defendants can request such a stay, but it would be up to the individual courts to grant such a motion for a stay. (2) The Perry Appeal has been assigned to Judges Brown, Millet & Ginsburg. I know less about the last two, but Judge Brown is a hard core libertarian who believes all rights come from property rights. Take a look at her wiki page -- https://en.m.wikipedia.org/wiki/Janice_Rogers_Brown#Political_views. We literally could not ask for a better judge to be on the panel. Also, a friend of mine is currently clerking on the DC District Court of Appeals, so I'm going to try and schedule coffee with him when I get back from vacation in a few days to feel him out on the other two judges. I'd heard of them, but I don't have a great sense of their judicial views.

The MDL thing is beyond my depth. I'll have to ask around, but I think you usually consolidate into an existing court rather than move to a completely new court. Moreover, they're trying to move to DC so they can use Lamberth as precedent -- doesn't matter if they get Lamberth assigned or not.

Move to Canada. Canada has the worst government since inception. In the poll! How do you change your vote in the thread's poll...

How do you change your vote?

Jacobs stuck out like a sore thumb in that group. Reads to me like Defendants are worried and thus delaying.

In both situations, the main goal is to avoid embarrassment. Partially for ego purposes and partially because embarrassment can be used by your opponent as a political cudgel. In Einrhorn's case, they avoided embarrassment by trying to sweep things under the rug. They've done the same in this case, but faced with the threat of a reveal of evidence or a loss, the face saving then works the other way. But we'll see. We should have a decision on the motion to compel pretty soon? It's been fully briefed for a while. @Jurgis, agree with cherzeca on pre-payment, but maturity distributions for legal cases are very case specific. Unclear that's helpful on an aggregate basis.

Agree that the Pagliara thing is probably a precursor filing to something else, but it will also provide a significant amount of information that I think we won't be getting from Fairholme Discovery? Once again, keep in mind my terrible record of timing predictions in this particular case and my inherent long bias, but I can't imagine that with so many cases coming to a head in the next two months that (A) plaintiffs aren't reaching out to try and discuss a settlement and (B) defendants aren't thinking about it just a little bit.

Seems like we have a lot of stuff all coming to a head in the next one or two months Motion to Compel in Sweeney Court Motion to Dismiss & Application for Certification in Delaware Perry Appeal in the DC appeals court Complaint for Access to Records

The pressure seems to be turned up a bit...

Oh God, I agree with John Yoo on something. That makes me uncomfortable. *sigh* http://www.sfchronicle.com/opinion/article/Will-feds-wall-of-secrecy-in-Fannie-Mae-case-6885976.php Note, John Yoo is Mr. Torture Memo -- so that's where my unease falls.

I don't want to get too into the weeds on this, because I think only Washington Federal is taking on this battle. And it's not what's most important in the immediate future. I would separate the difference between funding and capital. Fannie & Freddie could continue to fund their financial obligations coming due via the methods that ESL points out. I believe the three situations you've pointed out failed because of the inability to meet short-term obligations as they came due but I could be wrong and just going off memory. As for the capital issues, which I think you're referencing, you should take a look at the 2007 10-K: Again, working off memory, much of the losses came from two sources: (1) non-cash charges concerning tax asset valuation allowances and (2) increased credit provisioning. I think the latter was over $100 billion worth -- which wouldn't have impacted total capital.

No. Because in order for the NWS to be upheld, it would also have to pass through the fiduciary duty claims that have been leveled against it. (See the initial complaint in Jacobs.) Unless there was some way for them to say that under conservatorship fiduciary duty goes out the window -- which... is difficult because most laws dealing w/ conservatorship require the conservator to be a fiduciary, and I don't see anything to the contrary in HERA.

@merkhet and hardincap while i am still thinking this through, if you read the perry class plaintiffs briefs (breach of K and fid duty) against the perry institutional briefs (APA violation for exceeding statutory authority under HERA), it seems to me that the class P case would go on even if the appeals ct upholds lamberth on the anti-injunction provision of HERA. you could have remand to try class P case and award money damages to class P from GSEs under conservatorship (which is not a fed instrumentality and need not be sued in fed ct claims) Yes, that's my read of it as well. 4617(f) specifically states "no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver," and as Steele correctly pointed out (IMO), it does not restrain courts from providing monetary relief to the extent that there is a path towards monetary relief.

Yea, and we're in agreement on that part. We're really talking past each other in terms of lexicon. When I say NWS is upheld, I mean substantively upheld and therefore, implicitly, the injunction was not upheld. And sorry to nitpick, but I wouldn't say that FHFA was exempted from its fiduciary duty to uphold because of 4617(f), but rather that there is no mechanism to enforce FHFA to exercise its fiduciary duty. I know it looks the same output wise to the layman, but input wise it is very, very different. It's not as if FHFA doesn't have a fiduciary duty anymore -- it still does! -- but if it decides not to enforce it, there's no way for someone else to force them to do it.

I don't think the issue is whether the government would settle with the junior preferreds and not the common stock -- that is so unlikely as to be a zero percent chance in my book. My main issue is that during any possible settlement, the people who are going to get diluted are the common shareholders. Let's say that the companies can, on a combined basis, make $14 billion after-tax, and that it deserves a 15x multiple. (We can quibble w/ those numbers, but this is just a conceptual exercise.) Then the GSEs are worth $210 billion -- but they're not worth that amount without capital! So there's, what, $7 billion of capital left in the GSEs? They need somewhere in the $150 to $200 billion range. (Maybe that's an overestimate, but whatever.) So if the NWS payouts net out the full amount of the liquidation for the government preferred, then that means the first $7 billion accrue to the junior preferreds. As do the next $27 billion! It would take years to internally generate the capital necessary to get fully capitalized and the first two years would go all to the junior preferred. No way that's allowed to happen. So that means raising capital and changing the junior preferred over to new common. And the old common over to new common. So my guess is that you get a par or darn close to it for changing the junior preferred to new common -- in exchange for going lower in the capital structure -- and then you raise a bunch of capital. That's bad for the upside of the old common.

Haha, my handlebar mustache comment was a bit facetious. Everyone has a view of where things trade in the short-term. It's hard not to have one. We're almost biologically primed for it. My point is that one shouldn't be too attached to it because it's seldom more than a guess. Figuring out the voting machine is much more difficult than figuring out the weighing machine.

I disagree on a fundamental basis. I have no clue where the shares trade in the short term though. At the end of the day, the common is more levered than the senior tranche ceteris paribus. However, all else isn't equal. In a situation where the NWS is invalidated and (A) the cash is used to pay off as much of the government preferred as possible or (B) returned to the companies without paying off the government preferred, then you still have a very serious undercapitalization problem which is reflected first and foremost by the value of the common. Common is levered because it's at the bottom of the capital stack, and that's usually a bad thing for an undercapitalized company. Moreover, any recap that happens will have to deal with the junior preferred before the common. My guess is that the junior preferred will either (A) get paid off (unlikely) or (B) get switched over to new common (probably at par). It's currently very difficult for me to know what happens on the way from changing old common to new common. I don't know about Perry, but I think Fairholme is in for the long haul. If he's to be taken at face value, he's thinking about this in the AIG manner, and my guess is he's making a big bet on the coming wave of new household formation that's going to hit in the next few years. I would be surprised if he blew out of the stock immediately after litigation and/or recap. (Remember, he blew out of MBIA because he wanted to be invested in Fannie & Freddie.) As a side note, I'm not sure that we get to a ruling on any of the cases we're all waiting on right now. (Btw, this probably incorporates some personal biases and/or endowment effect from being long so dock it for some optimism.) If the motion to compel goes FUBAR for the government or the oral arguments in the Delaware case or Perry appeal start to go poorly, my guess is that the government comes to the table. It's going to look really bad in an election year for the Democratic Party to be on the side of nationalization (and lose the case! Edit: Actually, it might be bad for them to win the case too!) when Bernie has pushed Hillary further to the left than she is comfortable being. Do you really want to screw around when the alternative is a Trump presidency? God, I hope not. Ergo, it's not just about the bump that occurs post-litigation. It's also about what any possible settlement might look like pre-ruling -- and I know that's an unpopular thought because many people here are pretty set that there is no way the government will ever settle.

I guess what I'm struggling with (because I get your points to a certain extent) is that this is all being done with the benefit of hindsight. I think that once the bailout deal was made before the NWS, pretty much anything could be put on the table. We might live in the United States of America, but there are hundreds of thousands of people in jail or whatever who can tell you that the system isn't always fair, for various reasons. We shouldn't be waterboarding or torturing people but it happens anyway because the pain of a few is seen as better than pain for millions. A very, very large amount of people are benefiting from the fact that FNMA guys got "screwed" (hey at least there's still *some* value left for the equity/preferred) but the price had to be paid somewhere. IMO, I feel terrible for the investors who gobbled up all these preferred ahead of the bailout. I remember working at a large sell-side firm that was stuffing tons of retail accounts because they were getting paid 3% to do it and rates were so low that it was an easy sell. As soon as they started trading, they dropped 5 points. It was a sucker deal. I'm oddly a tad sympathetic to your point here, Picasso -- even though I also think that Fannie & Freddie did not actually require a bailout back in 2008. I know Eddie Lampert is often persona non grata here at CoBF, but if anyone knows about selling off pieces of the company to fund operations for much longer than anyone expected... it's ESL. http://searsholdings.com/invest/chairmans-letters/february-2009 Regardless, though, I'm willing to give actions that were taken in the fog of war, so to speak, a bit of leeway. The main focus is that the companies were solidly profitable by the time the NWS came around, and it's a bit like a company going through pre-pack w/ bondholders four years prior and then going back and trying to get even more equity when it turns out that the initial projections of the companies' profitability happened to be way too low.

Yes, I sort of agree on rhetoric -- but I think the point is that if the holding ends up being that preferred shareholders can bilaterally, with the agreement of management, decide that they will transform their preferred shares into new common shares that are above the rest of the capital structure, that's going to be bad for the stability of companies in general. Theoretically, the very next day, I would go out and start picking up preferred shares and contacting management to carve up companies 50-50. (Change my preferred dividends to a full sweep, and I will vote to increase your pay by a ton!) A few unscrupulous management teams will probably go for it! except its not exactly like that, bc there would be no anti injunction provision that shields management from legal challenges on grounds that they neglected their fiduciary duty to common shareholders You're mixing and matching arguments (probably unintentionally). If the NWS gets upheld because of the anti-injunction provision, then it is upheld procedurally rather than substantively, and I would agree with you. In that case, no one ever considers the substantive question of whether the NWS is legal or not. If, however, the anti-injunction provision is found not to be a procedural bar to plaintiffs' case, then the court will move on to discussing the substantive question of whether the NWS is legal or not. In that case, if the NWS is upheld, then we would be in the weird world I described above.

Yes, I sort of agree on rhetoric -- but I think the point is that if the holding ends up being that preferred shareholders can bilaterally, with the agreement of management, decide that they will transform their preferred shares into new common shares that are above the rest of the capital structure, that's going to be bad for the stability of companies in general. Theoretically, the very next day, I would go out and start picking up preferred shares and contacting management to carve up companies 50-50. (Change my preferred dividends to a full sweep, and I will vote to increase your pay by a ton!) A few unscrupulous management teams will probably go for it! I'm not sure this is much different than buying a bunch of debt and contacting management teams to file Chapter 11 with a restructuring agreement that gives me the equity - a pretty well established tactic. Doesn't really matter for the stability of companies in general because almost all companies are solidly solvent and therefore very difficult to this type of attack. I think if the NWS were eliminated by a court the preferreds would go to around $17-18 at the moment. Very little chance I would think of dividends starting again in the next several years even absent the sweep, given that there is no current traction in Congress to reform the system. Clearly, however, they should trade well ahead of the ~$10-11 where FNMAS was trading pre-Lamberth. Main difference here is that in a bankruptcy proceeding everyone in the capital stack has various protections via bankruptcy laws... Also, FNMA was very solvent in 2012.

I think the preferreds go to $20 or more. But, again, handlebar mustache. I have a view on the intrinsic value. But the market value shortly after invalidation? Tough to tell.

I suspect that common might get a 3x bump or so, but the overhang of immense dilution from any possible recap will be tough to overcome. Keep in mind, though, this whole thing is textbook speculation. I mean, my answer has about as much validity as me announcing that I suspect God has a handlebar mustache.

I am curious why you think common will have that wild a ride...

Yes, I sort of agree on rhetoric -- but I think the point is that if the holding ends up being that preferred shareholders can bilaterally, with the agreement of management, decide that they will transform their preferred shares into new common shares that are above the rest of the capital structure, that's going to be bad for the stability of companies in general. Theoretically, the very next day, I would go out and start picking up preferred shares and contacting management to carve up companies 50-50. (Change my preferred dividends to a full sweep, and I will vote to increase your pay by a ton!) A few unscrupulous management teams will probably go for it!