merkhet

Thanks for posting. Too bad it's not publicly traded. :(

So, I'm at a bit of an impasse here. I am/was a lawyer (since everyone else is putting up this disclosure), and the Maniere case reads to be pretty on point with the situation in the Fairholme case. The only remaining distinguishing point seems to be that in Maniere, the company was made insolvent in an instant, and in Fairholme, the insolvency is "ongoing." I'm unclear as to whether this is enough of a distinguishing point to make a difference. Moreover, if the Takings is ongoing, it also brings up the procedural issue of "ripeness." The flip side of this, of course, is what muscleman pointed out. The interrogatory is dated May 7, 2014, and there was just the one question. If Maniere is the silver bullet, then what was the point of allowing the Fairholme case to get all the way to depositions? Is it incompetence? Am I missing something? I have yet to reconcile these two.

Carney linked it because that's the case that is directly cited for the idea that you have to own the property at the time the taking occurred.

In all the commotion around the Fairholme Motion to Dismiss, it seems this filing went unnoticed http://gselinks.com/Court_Filings/Cacciapalle/13-466-0053.pdf

I goolged really hard but can't find the original ruling for Maniere. The fact that so many case are citing it implies the document should be available in a lot of places, but we can't find it. ::) merket, do you have access to some legal library? I find it perplexing and anti-common sense if shareholders bought after the taking cannot sue. I remember someone said that Fairholme or maybe Perry case has 3 original preferred shareholders who held from 2008? In that case, the suit should still be valid even if Maniere case applies right? Well, yes, but it's of no use to us. If it's the case that only shareholders at the time of the Net Worth Sweep have standing to sue, then only those shareholders will be able to recover any money from the Takings. The rest of us would receive nothing.

I am not a lawyer so I could be completely wrong, but I felt like it should be common sense for the current shareholder to receive the recovery. I read a story about a guy buying default credit card notes at 1-2 cents on the dollar during 2008-2010 and then try to collect 20 cents. He made a killing. Of course when he buys those papers and recover the money, he is the one to receive the money, not the previous bank who sold him the notes 1-2 cents on the dollar, right? When Fairholme buys the preferred shares at the market price, that price already discounted the potential recovery benefits, so if recovery does occur, fairholme is entitled to it, right? The difference is that there are results based on common sense and results based on legal reasoning. Sometimes they come out to the same conclusion. Sometimes they do not -- here, the question is whether there is a legal technicality in terms of whether the "right to sue for a Takings" passes on beyond those shareholders holding as of August 17, 2012. While the Slattery ruling is rather persuasive, it talks about distributing a restructuring surplus rather than distributing the proceeds from a finding of Takings. (I've only quickly skimmed it, so it's possible I'm missing something.) This could be persuasive to a judge, but the question here is best framed the following way: "In the case law for Takings Clause claims, is there a direct precedence stating that the individual(s) suing the government for a violation of the Takings Clause must have been the owner of that property/claim at the time of the Taking?" The government's motion indicates that Maniere says this. Until I get a copy of it in my hands, I can't say one way or the other whether the legal technicality that the government is trying to put forth is correct. The best I can say is that many of the cases citing Maniere that I've found mention something about third-party beneficiaries, in which case, it wouldn't necessarily apply. I've taken a look at the Textainer case that was cited as well, and it seems like that could be distinguished by the fact that when buying shipping containers, you have the opportunity to negotiate for exactly what you are buying (i.e. which assets and which liabilities you are expressly taking on) and the plaintiff in that case didn't specifically negotiate for the assignment of the right to sue for a Takings Clause violation.

The Government has moved to dismiss the case because Fairholme didn't own the shares at the time of the Net Worth Sweep. https://timhoward717.files.wordpress.com/2015/06/6815-defendant_s-supplemental-motion-to-dismiss.pdf Does anyone have access to the following opinion? Maniere v. United States, 31 Fed. Cl. 410 (1994)

Ah, yes. I didn't adequately list out my assumptions. You're correct that a company's compounding will only tend towards the ROE if they can earn roughly the ROE on incremental capital deployed in the business. (In my mind, that's companies like AXP or the banks.) The problem Coca-Cola faces is similar to the problem faced by See's Candy. The return on equity is fantastic, but there's little need for incremental capital (pre-ownership of bottling plants, anyway) -- as a result, you'll have to redeploy that capital elsewhere, and the common choices are (A) acquisitions, (B) dividends and © share repurchase.

Over a long enough time, though, the compounding will tend towards the ROE, so even if you buy very cheap, that still washes away over time.

So, I suppose what you're saying is the following (please correct me if I'm wrong): Assuming that the plaintiffs win in the Court of Claims, after a possibly lengthy trial, the Government can then argue that despite the GSEs' ability to meet the 10% dividend payment for the last three years (and, presumably in the future as well), the court should instead take an "expected value"-type calculation on their ability to pay that 10% dividend going forward -- and in some model, one could foresee a quarter or two where the 12% PIK option kicks in and the adds a little to the compounding. That's certainly a non-zero possibility, but I think it's improbable. (I find the need again to point out that I also felt the Lamberth opinion was improbable, so maybe take my probability judgements with some grain of salt.) There would certainly be some cognitive dissonance to say that despite what happened in reality, we will go with a model that says something different -- though this might be where the Treasury models indicating that they could see a fairly profitable pair of GSEs comes into play later. As for the solvency issue, even assuming that you paid the last three years' worth of 10% dividends to the Senior Preferred, you'd still have $178 billion in equity or 3.56% equity to the $5 trillion of guarantees which isn't quite 5% but a bit better than the 0.1% we are currently running at with the two entities. It's possible that you'll have some drawdown on the equity in the future if the GSE earnings don't quite cover the payments, but, at the same time, the run down of the FIA business provides a cushion, and in order to bring in new private players, you have to raise the guarantee fee, which increases GSE earnings as well. That's my take anyway.

twacowcfa, Sorry, I'm still confused. Assuming the court views this as a Takings and engaged in a but for analysis... Why would they miss payments after August 2014? They've been consistently able to cover the 10% amounts and once they received the DTAs again, couldn't they just write those down for the payment?

I'm confused. Fannie & Freddie already have a Fixed Income Arbitrage ("FIA") business that's distinct from their Guarantee business -- as you let that FIA business wind down, it will generated $24 million over the next two and a half years or so. You're not starting up a new FIA business -- you're letting the Guarantee business live on. (But maybe I'm missing something here...) Also, I'm not sure why you're compounding the 10% dividend on the Government Preferred. It's simple interest -- not compound interest. The Government Preferred gets paid $18.7 billion a year. It doesn't get paid $18.7 billion the first year and then $20.57 billion the next year... the only compounding that would happen is if the Companies take the 12% PIK route.

Thanks twacowcfa. I think that we have to think of two (maybe three) different possible end games here. (1) Court of Federal Claims: In Sweeney's Court, no one is contesting the Net Worth Sweep ("NWS") -- they are just assuming that the Government has the authority to take the property. Instead, they are merely asserting that they should be paid for the fact that the sweep has essentially expropriated their dividend rights and their liquidation preference. In other words, "but for" the NWS, the windfall over the past few years would have dropped down to the Private Preferred. Think of it this way, can you add up to $222 billion in a liquidation? ($187B Senior Preferred + $35B Private Preferred.) Well, F&F have paid out $228 billion over the last few years, so it sure looks like it's possible. Even if you tack on the $56 billion for the 10% dividend, you've got Pershing Square saying that the Fixed Income Arbitrage department can produce $24 billion over the next two years or so. Add that to the $6 billion of equity remaining in the companies, and you're looking for $20 billion from the companies' earning power -- I suspect that they could do that in a little over a year or so. I have no idea what happens to the common here. (2) Reversing the NWS: Similar to the above, you'd net out $56 billion from the $228 billion (for the 10% dividend on the Government Preferred) so you're left with $172B + $6B equity left in the companies or $178B in equity on the books. Can the combined net income from the two companies support the $18.7B in 10% dividends paid out to the Government Preferred? (You'd have to run your own numbers on this one, but my personal calculations indicate that they probably could.) And then you've got $178B "stuck" in the two companies unless there's either a release or a receivership -- either way, the Private Preferred is well covered. (3) Let's Make a Deal: In a deal, it's likely that the deal struck for Private Preferred will take into consideration that they're pretty well covered in (1) and (2). That's the way that I'm looking at this, anyway.

The filings keep getting more comical: The whole thing is a pretty good read. I'm starting to wonder what's in the Treasury privilege log that's so important. I mean, it's a privilege log. What's the point in fighting so much over what is, presumably, a non-important document? http://gselinks.com/Court_Filings/Fairholme/13-465-0159.pdf

LBTYA - Mike Fries CHTR - Thomas Rutledge LMCA - Greg Maffei

One of the things I see a lot of people forgetting on the calculation of par for the preferred -- there's likely to be interest @ around 9% per annum if it's ruled as a taking. [Edited because I realized that the reason for the interest was unclear.]

Jurgis, I'd be interested to hear the ways you could see preserving a 30-year mortgage with very little return to shareholders and preferred holders.

Yea, just to clarify -- I personally don't think it's a lottery ticket based off of what Jim Millstein said in front of the House and the Senate, but reasonable minds could disagree on that. And based off that, I can, and have, allocated more than a "lottery ticket"-sized position to it.

The easiest and most immediate one was banking. If you restrict it to retail banking... (1) Figuring out how the machine works You figure that a bank works by taking in money (deposits) and putting out money (loans). The way to make money from that is to make sure you pay less on your deposits than you earn from taking on loans. Moreover, you can, hopefully, grow your business by taking on more deposits. (2) Comparing your mental model to the world When you read the annual reports, conference calls and presentations of the "Big Three" (JPM, WFC, BAC), you learn a little bit more about how to adjust your mental model. First, you realize that while your model is roughly correct, it's missing some stuff. Banks can make money on both net interest income (loans) and non-interest income (fees). On top of that, it's important to make sure that you don't spend very much money servicing your accounts, which is represented by the efficiency ratio (non-interest expense over revenues from net-interest income and non-interest income). You'll also learn (or, rather, understand more deeply) that we're in a low interest rate environment. If you read the presentations, conference calls and reports, you'll start to realized that there's something called the net interest margin. (If you somehow missed it, and yet you read constantly, you probably would have picked this up from the JPM Warrant writeup that was posted here from some small group of investors.) Now, while you might think that the spread would stay relatively constant, that's not actually the case. It turns out that while the interest you pay is based off where interest rates are, the interest you get paid is based off some opaque combination of where interest rates are and where "demand" for loans stands. So, when interest rates go up, all things equal, the spread shouldn't open up, but since all things aren't equal, as more people start chasing a "limited" amount of loanable capital (restrained by various regulations, prudence, etc.), the spread does open up. The next step is to figure out how their deposits, and by corollary, their loans grow -- since deposits, up to some regulatory cap (assuming that you don't have people trying to get around the cap), are the bottleneck for loan growth. Cross-selling is pretty useful because it's likely easier for both economic and psychological reasons to sell to someone who's already a part of your accounts than trying to go for someone new. Moreover, deposits will likely naturally grow as individual circumstances improve. (There may even be a virtuous cycle where an improving economy increases deposits while loan demand goes up.) If you're a smaller bank, embarking on opening up more branches (or if you're a non-branch bank, more advertising) will help grow your deposits. If you look at Zion, they were rather bright (if a little spendy) in picking up Amegy Bank in 2005 so that they could participate in loans to the oil & gas sector, so that's another strategy as well. (3) Miscellanea There's more stuff around the periphery that also matters. For instance, there are also various benefits of scale where people need the ability to either (a) get at their money from a teller or (b) get at their money from an ATM, preferably yours. There's also economies of scale, but that's likely rolled into a particularly low efficiency ratio. One of the things that people are learning from Bank of America is that the current regulatory structure penalizes finding the "cheapest" bank versus the market leader -- which is counterintuitive for an investor. While Bank of America is certainly cheaper than JP Morgan and Wells Fargo, they can only benefit towards closing that valuation gap rather than being able to both close the valuation gap AND have proper capital allocation through share buybacks -- so if you're comparing the three, you'll have to make a judgment call as to whether closing a larger valuation gap (BAC) is going to make you more than closing a smaller valuation gap combined with freer capital allocation for buybacks (WFC, JPM). This is likely going to be determined by (A) your sense of how long it will take to close the larger valuation gap and (B) how long you plan on holding the investment. Also, the risk level of their loan portfolio matters, and a lot of that is a bit fuzzy to analyze. While you can look at how their NPLs are doing and take a look at how they're diversified across sectors and sizes of companies, that's statistics rather than causation -- in other words, you're probably going to have to develop a sense of what the culture is like at the company through viewing what's emphasized at the top -- and this will come from conference calls, shareholder letters, etc.

1% lottery ticket. Holding prefs. No buy timing. Would sell if it went to ~0.5 expected value without resolution in courts. Otherwise hold until resolution one way or the other. Unless you are a lawyer experienced in this particular branch of law, have read through all the legal documents and are experienced in assigning probabilities based on legal documents so far, this is a pure lottery ticket. Don't kid yourself that you know the "certainties" or probabilities based just on what Merkhet, Fairholme, Ackman and a bunch of journalists write. I agree -- it's hard for anyone without some sort of legal training to really understand this situation. As a result, I would size it based on your level of understanding of the situation up to some cap.

This is because the Court of Claims case is regarding whether or not it was an illegal 5th Amendment taking, whereas the District Court litigation is about FHFA not acting as a Conservator, right? Correct.

I do the following: (1) Take a step back and imagine how that industry should work (i.e. think of Ray Dalio's "economic machine") (2) Read the conference calls and annual reports for all the companies to see what variables seem to matter most to the operators (3) Try to reconcile (1) and (2) After that, you should have a pretty good sense of the key variables -- some from you, some that you hadn't thought of from the operators.

Government has turned over a public, non-protected, final privilege log for FHFA -- though there is no mention of when they will turn over the log for Treasury, which is probably the more important one. Looks like depositions are proceeding on pace. 2015-06-01_Defendants_Motion_for_Leave_to_File_Sur-Reply.pdf

It's more useful for the public opinion part now than the litigation. Right now the litigation in the Court of Claims does not care about the reasoning behind the sweep.

I feel like, implicitly, ranking is part of figuring out if you can go to a 100% position, but I'll defer to the Moderator Gods (if we actually have any...) By discretely, I mean that, JPM > WFC > BAC -- not that I necessarily believe in that ranking, but it's just an example of what I'm trying to say. In other words, ranking discretely would be to say that you can rank any individual company/security versus other individual companies/securities. By grouping, I would mean that, it's probably safe to say that JPM, WFC, BAC are better bets than, say, a group of random reverse merger Chinese companies. Now that's an extreme, but it can be applied to less extreme situations where you might be able to say that JPM, WFC, BAC are probably better bets than a group of steel companies (maybe excluding Posco). I think the point you're trying to make on discrete rankings is that it's difficult to know a priori whether you're correct, and it's difficult to know how you weight expected return versus dispersion of outcome, and you'd be right! Ranking (and position sizing) is more art form than science -- but Greenblatt's advice to put more in the investments where you're more certain you'll not lose money is probably the right way to go.