merkhet

I have no idea what he was thinking. No point in speculating. My main issue with Lamberth is that he interprets HERA as authorizing FHFA to do anything rather than just a few things. In other words, I don't think FHFA is allowed to act arbitrarily while Lamberth thinks it is allowed to do so. But, of course, you have to allow for the fact that I might not be objective given that I have chosen a side on this one.

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.

Yes. The U.S. Court of Federal Claims has limited jurisdiction to monetary claims brought under federal statute (and various other Government related laws and actions). So the U.S. Court of Federal Claims, for instance, couldn't hear a case that deals with whether a U.S. Government agency overstepped its bounds by sidestepping Delaware corporate law, which is a matter of state law and is not purely a monetary damages issue.

I mean, I suppose that the flip side is that watching old people slowly starve to death is... not particularly uplifting and/or mildly horrific? I get what you're both saying here, but it's not a repeatable game for these particular folks. You shouldn't incentivize poor decision-making. Totally agree. Perhaps old people slowly starving to death because of bad decisions serves as a helpful reminder to everyone that they should adopt long-range thinking. (Much like how seeing the increasing incidence of Type 2 diabetes in the U.S. has caused obesity rates to plumm... hm. Wait.) I'm not entirely sure what to do about the old people who have made bad decisions in life policy-wise. However, I'm not sure that feeling sorry for your fellow man or woman when you see them struggling is... completely irrational? And/or something to be stomped out? I guess what I'm saying is that you can simultaneously think: (1) wow, you made some poor decisions during your lifetime and (2) wow, I feel some compassion in seeing you struggling at your age.

That's the way the documents read. The $188B the U.S. has put into F&F entitles the U.S. to receive 10% per annum on cumulative preferred shares. Those accumulating dividends that have not been paid compound at 10% per annum, adding to what is owed the U.S. Pro forma, what would be owed the U.S. annually without the sweep is considerably more than $18.8 Billion, and the mountain of arrears in addition to the $188 principal amount is growing at a rate of 10% per annum as we speak. So that's what I was hoping to tease out with my question. Why would the dividends accumulate but for the sweep? Because but for the sweep, the companies were making tremendous profits (even aside from the mountain of non-cash DTAs that were recognized because of that profitability). And the non-2013 profits above understate the companies' cash earning abilities because the DTAs would have kept cash taxes low, which means even more dividend paying capability for the GSEs. Alternatively, I suspect that, to the government, trading DTAs for dividends is probably just as good to them as cash, but that's a leap that doesn't need to be made because cash profitability would have been enough to continue to pay the $18B in dividends. Am I missing something here? Do you have a link to this? I'd be curious to see who that might have been. It looks to me that any settlement is going to have to come from the Administration because the Treasury holds the GSEs by the balls via the covenants in the SPSPA, and I'm not optimistic that this Administration would be willing to make any move unless forced to do so by some development in the legal courts. (Which is why I was asking for the reason you think a settlement might have been in the works.)

Merry Christmas and Happy Holidays!

If Berkowitz was getting out, I suspect the price would be much lower. He owns a ton.

Hm... that has to be an accidental statement. If settlements were underway, there's no way that nothing would have leaked by now, right?

Why would the ten percent compound?

I understand your skepticism, but I believe the risk/reward of a substantial recovery is still heavily skewed towards preferred shareholders. Take the upcoming court decisions, for example... I dare to say that jurisdiction being granted is a very, very high likelihood in both Sweeney's court and Sleet's court. In Sleet's case, I can't imagine the former Chief Justice of the Delaware Supreme Court (Steele) so grossly miscalculating a case in his own state to not warrant jurisdiction. In Sweeney's case, she has said as much: "But I want the Plaintiffs to have — I mean, their day in court..." I'm curious where the prefs would logically trade assuming jurisdiction is granted in both cases. Certainly much higher than $3.40-ish on FNMAS, no? Further, it seems like a high probability that Steele will win the Delaware case. I wonder what a logical price for the prefs would be in the event we win jurisdiction in both cases and win a "NWS is illegal" verdict in Delaware. As much as I agree with you on the prospects of the Delaware case, I'd be a little hesitant to use the highlighted reasoning. Never ask your barber whether you need a haircut. :)

I'm also looking forward to Steele's written reply to each government argument (due January 16th) in the Delaware case. Quotes from Steele on his conference call regarding his upcoming response: “Let me ease any concerns… nothing in any of the briefs by the government could be considered a surprise or unexpected. The arguments were very predictable. Nothing we’ll have a hard time responding to.” “The government set up a standard they must comply with and then they violate their own standard. You’ll see this clearly in our response briefs.” “We will dispute each and every claim the government made, there are no concessions to be made.” Same. I think this is the easiest case for us to win. It would set a particularly poor precedent for a senior preferred shareholder to be able to create an effectively "second tier of common stock" on top of the rest of the capital structure. Edited my prior post to include the January date.

The inclusion of Jump Start language in the omnibus bill is definitely a negative, though I don't think that it goes as far as passive acquiescence to the NWS by Congress given that it was passed as a rider on a must-pass spending bill. Even assuming that it is passive acquiescence, that doesn't seem to affect the analysis of a Takings claim (Sweeney case) or the analysis of whether HERA has the power to rewrite parts of Delaware corporate law (Delaware case). Also, what do you mean by one case? There are multiple cases before various courts right now.

Here's a collection of dates to watching in the three big cases. Fairholme v. United States - Court of Federal Claims: January 21, 2016 - Joint status report suggesting future proceedings http://gselinks.com/Court_Filings/Fairholme/13-465-0240.pdf Jacobs v. FHFA - District Court for the District of Delaware: January 16, 2016 - Plaintiff's Response Brief February 16, 2016 - Defendant's Motions to Dismiss will be fully briefed http://gselinks.com/Court_Filings/Jacobs_Hindes/15-00708-0022.pdf Perry v. Lew - Court of Appeals for the District Court of Columbia Circuit: December 21, 2015 - Appellees' Brief(s) February 2, 2016 - Appellants' Reply Brief(s) February 16, 2016 - Deferred Appendix March 8, 2016 - Final Briefs http://gselinks.com/Court_Filings/Perry/14-5243-1583683.pdf

It has been a while since I've checked the documents, but I'm pretty sure they didn't have provisions for repayment.

You seem very confident in par as the outcome here - do you not worry at all about a Starr type outcome? i.e. judgement for the plaintiffs but determination that the amount of just compensation is far less than one might have desired. It's an appealing outcome for the judiciary b/c it avoids a huge and highly unpopular negative windfall for taxpayers while upholding all the basic principles at stake. I think its also easy enough to defend from a financial perspective. After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount. A little. My understanding of the Starr case is that the decision was written this way because "but for" the government's money, AIG would have been a zero. In this particular case, the argument seems to be that but for the change from 10% to all of the earnings, then Fannie & Freddie would have been a zero. However, the evidence doesn't prove that out. It shows instead that but for the change in terms, Fannie & Freddie would have been very profitable. So I worry a little about that outcome but not a lot.

http://valueplays.net/wp-content/uploads/Screen-Shot-2015-12-16-at-11.46.43-AM.png Oddly enough, the bill says that "the Secretary may not sell, transfer, relinquish, liquidate, divest or otherwise dispose of any outstanding shares of senior preferred stock acquired pursuant to the Senior Preferred Stock Purchase agreement," but it says nothing about conversion? Is a conversion of the Government Preferred to common shares equivalent to "otherwise disposing" of the preferreds? Unclear. What if the government holds on to the converted shares until January 1, 2018? // In any case, my sense is that our best outcomes now are as follows: (1) A win in the Court of Federal Claims (Sweeney's court) If we win this case, the payment would be par ($25 or $50, depending on Series) with the possibility of some interest on top of the par amount. This is preferable now over the other situations because of the Jump Start provisions that might hamper a recap. (2) A win in the Delaware court If we win this case, there are two possibilities. (A) The amount that the GSEs have overpaid past the original 10% amount gets deposited into the GSEs or (B) the amount that the GSEs have overpaid past the original 10% amount gets applied to redemption of the Government Preferreds. While either situation is preferable to the current situation, it's difficult to tell what happens next. It's like the cookies are in the jar, but we can't really open it? In situation (A), the GSEs will be well capitalized, but they will still have the Government Preferred sitting on the top of the cap structure taking a combined $18 billion off earnings. In situation (B), the GSEs will have very little capitalization but the amount that the Government Preferred takes off the top is significantly lower than before. The main issue is that the Government Preferred was a good way to recapitalize the entities so that they could then be released. The Jump Start provision nixes that opportunity. I suppose in situation (B), they could find a way to recapitalize the company through the exercise of the 79.9% warrants they hold -- so situation (B) is probably preferable to situation (A). [The warrants would still exist in situation (A), but there's no point in using them to raise capital because then it would just sit there underneath the full amount of the Government Preferred.] (3) A win in the Perry Appeal Same as (2), but with the errant possibility that we might end up getting punted back to Lamberth's court for a re-ruling rather than getting a straight up answer from the appeals court.

The passage of the omnibus bill (and part of Jump Start as a rider) makes it harder to recapitalize the GSEs... now we are waiting for news from the courts.

Or pick up some Oaktree Maybe I'd buy distressed bond fund run by Marks, however, I'm not sure I'd buy OAK. Asset manager is not the same as the underlying funds and IMO people make a fallacy when they buy one when they think that the other may do well. Fair point.

Or pick up some Oaktree

I didn't mean the preferreds caused the liquidation. I mean that the liquidation is likely to have pricing effects on the preferreds.

http://thirdave.com/wp-content/uploads/2015/12/FCF-Shareholder-Letter-12-2015.pdf It looks like Third Avenue's Focused Credit Funds are liquidating. If I remember correctly, they own some Fannie Mae & Freddie Mac preferred shares.

Sure, ask the guy who has been consistently wrong on the timing. :P I mean, it's possible for them to continue to drag things out with delays, but I get the feeling that, in the Court of Federal Claims, Judge Sweeney is getting impatient. Moreover, I think that appeals are much harder to delay than trial courts, so the Perry appeal should be on time. I haven't much more specificity than that. I think the most recent legal filing asking for Sweeney to review documents in camera is going to put some pressure on the Administration. in camera basically means that the judge will make the determination as to whether the documents deserve privilege or not. My guess is that if Sweeney allows it, then Fariholme will ask her to review the most sensitive documents first, so that they have leverage against the Administration in an election year.

Yes. Here's a link to the filing in my dropbox. GSE Links will also have it soon. https://www.dropbox.com/s/qjg2ign307chipm/2015-12-07%20Fairholme%27s%20Public%20Redacted%20Motion%20to%20Compel%20Production%20of%20Certain%20Documents%20Withheld%20for%20Privilege.pdf?dl=0

Merkhet, thank you for adding those! No problem. Looks like things are beginning to get interesting again for FNMAS holders. :)

I think the more important tweets are the ones that follow the two from Luke's post. It looks like there may be some (un-curable?) defects in the government's assertion of privilege. I have said this privately to people before, but, back in law school, the DOJ was known as a pretty high status place to work (maybe it was just the DOJ Honors program). This case is making it look like the Justice Department is full of people who are blatantly incompetent... The guy's twitter URL is as follows: