merkhet

Fairholme asks for a motion to stay the Government's motion to dismiss until after discovery is done. Very clever on behalf of the Fairholme lawyers -- keep the depositions going! Another interesting tidbit from the motion: 2015-06-17_Fairholme_Motion_to_Stay_Governments_Motion_to_Dismiss.pdf

No -- read the opinion very carefully. (The vast majority of legal work is merely the ability to read really boring things very, very carefully.) Wheeler mentioned that the only alternative to a government rescue was bankruptcy for AIG. He wasn't talking about whether there were alternative measures that the government could have taken. Whether the government could have loaned the money at 0% interest with no equity taken is completely irrelevant. The issue isn't what could the government have done. The issue was given what the government has done, what would have been the alternative had the government not done what it did. The distinction is subtle but very important. I agree with you that settling looks bad too. I think the choice that is before the administration (assuming some shenanigans with respect to the reason for the Third Amendment) is between which option is less shitty. Is it better to hand over billions of dollars to hedge funds and mutual funds and try to spin it as reforming an important foundation for homeownership in America (and making money off a sale of the warrants) or is it better to wait for evidence to come out indicating that the American government raided a private corporation as a piggy bank in order to play political chicken with the opposition party? I don't think that the people who could be damaged have all left office. If that was the case, I don't know that the Department of Justice would be fighting disclosure as forcefully as it has been doing.

I'd like to point out that we might be getting dangerously close to going down the rabbit hole here since all we have right now is a couple of things that seem to link together but no concrete evidence either way. (i.e. I don't know how obviously damaging things could be for the Administration because I don't have any direct evidence -- I only have statements from clearly motivated plaintiffs) The answer to your question, Mephistopheles, is that, yes, the Administration could pardon Ugoletti for perjury, but the political consequences would be dire -- there is a reason why Bush couldn't pardon Scooter Libby for his role in the Valerie Plame fiasco.

If the deposition is damaging enough, then yes. The only problem is that it's difficult to know how damaging the deposition is given that we are all on the outside looking in.

When do you think this will happen? thanks - C. The government reply on the motion to unseal Ugoletti's deposition is due on June 29th. My guess is that a rebuttal will be due July 15th. So you might get a decision a month or so after that. http://www.ft.com/intl/cms/s/0/45a86570-1441-11e5-ad6e-00144feabdc0.html?siteedition=intl However, if Bruce et. al. are correct in their assumption that the government swept the profits away in order to buy time on the sequester (and were able to prove it in Ugoletti's deposition), then I don't think we ever get to see an unsealed deposition.

FWIW, I think the action is actually going to be on the unsealing of the Ugoletti deposition.

I think the difference is that in those cases (1) the government actually declares a bankruptcy, i.e. there is a receivership with specific rules and the equity is actually wiped out, and (2) the "new owner" is a private entity. I think it would be unprecedented to both not have a declared bankruptcy and have the new owner be the United States government. The fact that there is no Chapter 11 in those situations is exactly what causes this case to be different, IMO. Here, there is a de facto Chapter 11. If you read the Wheeler opinion, the court asks "but for" the alleged action, what would have been the economic position of the shareholders. Here, the alleged action is the 2012 amendment and not the original 2008 bailout -- again, you'd have to "stack" it as twacowcfa has suggested, but I don't think that there is enough precedent to make that type of a connection given the distinguishing facts in this case. This is the least distressing part of the case to me. If you listen to everything that Judge Sweeney has been saying in the courtrooms, I think that a politically motivated judgment against the Fannie & Freddie shareholders is the least likely outcome. If anything, she's politically motivated against the Government. Wheeler is also a Republican appointee -- I don't know that this factors into her decision at all -- but a win for the Democrats here is not really going to help her chances moving on up the chain.

The first half will likely make you a worse investor, and the latter half will likely make you a better one. Perhaps the two will cancel out. :)

Yes, definitely go talk to a lawyer. As someone who used to be a lawyer and someone who currently runs a fund, even I get a little turned about with some of the random regulatory requirements for fund formation. A good specialist in fund formation is well worth his or her fee.

I think the risk that the same logic could be applied to Fannie and Freddie on economic loss analysis is close to zero. Correct me if I'm wrong, but you're saying one of two things: (1) Fannie & Freddie would have been worthless without the initial bailout of 2008, or (2) Fannie & Freddie would have been worthless without the initial bailout of 2008 and therefore any subsequent events are linked back to the initial bailout of 2008 Since no one outside of Washington Federal is saying that there was an illegal exaction or Takings Clause violation from the 2008 bailout, it doesn't seem like (1) applies. The only possibility for the government to use this language is to argue (2) -- however, that's a difficult row to hoe. Imagine, then, if the government were to confiscate value from GM tomorrow (or even AIG tomorrow) -- if the logic of (2) is correct, then the natural extension would be that once the government has saved your company from bankruptcy, all future actions the government takes are either permissible or require no payment. In the Fannie & Freddie case, if you follow Wheeler's logic: The correct method of analyzing the damages caused by the Third Amendment is to ask the question of what the preferred (and/or common) be worth "but for the [Third Amendment]." In our instant case, we can see exactly what happened in the years following the Third Amendment -- namely, record profitability, so the damages aspect is pretty clear to me.

You might want to define value investing. For instance, Buffett & Munger have indicated that value investing is merely exchanging some purchasing power now with the expectation of receiving more purchasing power later -- which is definitionally not a mistake.

Seems odd to me. The reason no damages were awarded because the judge says that Greenberg failed to show the harm to shareholders given that the alternative was an AIG bankruptcy with no government support; however, that wasn't the only alternative. The alternative was that AIG receive support under similar terms given to other massively troubled financial institutions at the time. I haven't read the full docs - just an article or two covering the decision so it could be the judge is giving credit to the gov't claims that no bailout would have happened without the equity kicker, but it seems like a strange line of reasoning assuming that bankruptcy was the only other alternative just because the government said so... The issue here isn't that the interest rate was too high -- the issue here is that the Federal Reserve did not have to authority to extract an equity payment based on its statutory authority under 13(3). Once it's established that the government did something wrong, which it did, then the question turned to "what was the harm?" In this case, the question was "but for the loan, what would shareholders have gotten?" And the answer was nothing -- and the interest rate was irrelevant to whether AIG would have gone bankrupt absent the loan. I heard someone mention that this could be construed as "The Fairholme Ruling" -- doesn't hurt AIG but helps FNMA. The bottom line is that the government acted illegally by exacting value from the shareholders. The reason they don't have to pay anything in AIG is that "but for" the loan, the AIG shareholders would have gotten nothing -- in the Fannie Mae situation, "but for" the 2012 Amendment, the FNMA shareholders would have been significantly better off financially.

Nice to see that Cooper & Kirk is ratcheting up the pressure. Looks like a response is due by 6/29.

There are two ways to continue legally for Fairholme. (1) Claim a continual taking. Would that work? Unclear. Read the paragraph in Maniere concerning environmental regulatory takings near the end of the case. It seems that environmental regulations are an ongoing process as well. (2) Claim that this is a physical taking so Maniere doesn't apply. This might be helped or hurt by the AIG case.

Can you explain this more? Which document? (We've had a few leaks now.) And what was anticipated?

I don't want this to sound like I'm picking on anybody, so please nobody take it that way. People need to read the Maniere case again. As I've said (multiple times) before, Maniere has TWO claims in it. The FIRST claim, is as follows: Maniere owns shares in First Federal. His first claim was for a breach of contract because he claimed he was a third party beneficiary of the contract between First Federal & the federal regulators to allow for treating goodwill as a capital asset for the purposes of solvency -- which then went away and caused the insolvency. This particular claim and its reasoning have absolutely no bearing on the case before Sweeney. The SECOND claim is as follows: Maniere was an owner of shares in First Federal but not until after the issuance of the regulations changing the treatment of the goodwill but before the actual declaration of insolvency. Thus, Maniere claims that, completely separate from the third-party beneficiary claim, he suffered a taking because of the change in regulations which took away the value of his shares. This particular claim and its reasoning may have bearing on the case before Sweeney. The court ruled against Maniere on both counts for completely separate reasons. The first being that he had no privity and, as correctly pointed out, the contract excluded him. The second being that he didn't own the shares at the time of the alleged Taking.

So I took a nice walk today to clear my head and think about this more, and I think the reason that the Government waited to pull out Maniere is what I said earlier: I went back to the Lamberth opinion to take a look at the breach of contract dismissal. The opinion specifically stated that there was no breach of contract on the liquidation preference because it wasn't yet ripe: and Perhaps the Government will argue that the injury for breach of K then goes to the original holders as well, but I don't think that there is case law that would support that. After all, much of bankruptcy law is based on the exchanging of breached and contingent contracts -- and as far as I know, those claims accrue to the holder of the security at the time of adjudication.

http://origin.www.gpo.gov/fdsys/pkg/USCODE-2009-title28/pdf/USCODE-2009-title28-partIV-chap91-sec1491.pdf It can issue equitable remedies only in very specific & limited situations -- see 1491 (a)(2) & (b)(2). It's unclear to me whether (a)(2) gives the court enough power to fashion a judgement the way that you've envisioned.

That's the one wrinkle to the case. In Maniere the receivership was one and done. Here, the sweep is continual. Does that matter from a common sense perspective? Sure. Does it matter from a legal perspective? Unclear. Another random thought: if the Takings is declared to have happened (and be final) as of August 17, 2012 -- then it would seem that Lamberth's argument that the contract claim isn't ripe should go away. It would be rather strange to say that for the purposes of a Taking, the shareholders lost everything on August 17, 2012 but that the liquidation preference (breach of contract) claim has not yet ripened.

I assume that Sweeney is smart enough to realize that this is a capital structure problem which needs a capital structure solution. Mailing checks out to people wouldn't resolve the underlying problem. If a judge ends up deciding for the plaintiffs, I would expect the most likely decision would be to roll back the net worth sweep, count all dividends in excess of 10% annual as paying down the government preferred, and recalculate the amount of government preferred outstanding. Sweeney does not have the power to do that. Her court is only authorized to hear claims that result in monetary damages.

It's not addressed -- they merely say that the plaintiff doesn't have standing. I agree that the logistics would be messy.

Eye4Valu, did you read the entire Maniere opinion? There are two claims -- one for breach of contract, which requires a privity of contract, and one for the Takings Clause violation. Your comment that "a little knowledge is a dangerous thing" is very condescending so maybe, instead, you can help explain to me why the ruling on the Takings claim does not apply here. Alternatively, perhaps this is where the confusion lies. The Sweeney case does not have a breach of contract claim -- if you read the 2013 complaint in the Fairholme case, you'll see that they only ask for relief for a Taking -- the breach of contract claim that you're talking about was dismissed for lack of ripeness in the Lamberth Opinion in September of 2014. (It's currently on appeal.)

So here's a thought that has been brewing in my head for a while now. Let's say that the judge agrees with this motion -- that means that there's now precedence stating that, if there was a Taking, the Taking happened August 17, 2012. So WR Berkeley files suit, and if they win, that means that the Government would have to pay out some amount to them (and all the prior holders of the companies' equity securities). However, that seems to be a waste because, if you believe that there are no workable substitutes for Fannie & Freddie, then how do you recapitalize the companies? If the government finds a way to recapitalize them, then that's a problem because now you've paid twice. Alternatively, you'd be locking yourself into the idea that private capital will either recapitalize the companies or step in to fill the gap with their own offerings -- both of which, thus far, have been a losing bet.

Chapman is wrong. He is completely ignoring the fact that the Maniere case alleges TWO claims of action -- one based on third-party beneficiary status and one based on Takings. Page 4 of the Maniere case posted above: Last page of the Maniere case posted above:

That's a fair point, since it doesn't mean the Government doesn't have to pay out -- it only changes who can bring a case and to whom the Government pays out. However, it still would have solved the issue of preventing Fairholme from continuing discovery and/or conducting depositions. Perhaps the issue here is that this is a delay tactic to push the resolution further into the future -- try to get this particular case thrown out and face the next case when it comes. While the fact pattern in the Meritor case is similar, it is not a Takings case. In the Meritor case, there was statutory language requiring the receivership surplus to be paid out to "shareholders." The argument there was whether shareholders means "previous" or "current" shareholders. The Takings issues, on the other hand, indicate that the people who have standing to bring a Takings claim are the individuals that were owners at the time of the Taking, because they are the ones harmed. Thus, the characterization of the Taking (length, etc.) is now paramount.