merkhet

Free market conservatives probably won't change their mind on nationalized mortgage insurance. I suppose reasonable minds could differ on this though.

colin, You actually have a pretty decent handle on this -- the importance of going to trial on a case like this is to be able to explain to a layman judge the types of things that you've pointed out. (Thankfully, Sweeney has indicated that Fairholme WILL see its day in court in her status conferences.) Essentially, the theory is that Treasury & FHFA knew that F&F would have to take non-cash charges that would be reversed once F&F reverted to profitability. This resulted in giving the government an excuse to force F&F to take cash that was then used to purchase a bunch of mortgages from banks. (Take a look at the cash flow statements from the 2013 10-K & the 2010 10-K and pay special attention to (A) the ballooning balance sheet because of consolidating VIEs and (B) the Net mortgage loans acquired by assuming debt.) For what it's worth, btw, that doesn't really seem to matter that much for the purposes of the claims in the Court of Federal Claims, but I believe that the one-two punch of the AIG trial and the Fannie & Freddie trial will change the political winds once people start to realize the extent of regulatory capture via Hank Paulson. In the end, though, I wouldn't pay much attention to Carney, Stockman or even Epstein for that matter when it comes to rhetoric. The only things that are going to matter are what Judge Sweeney (Court of Federal Claims), Judge Pratt (S.D. Iowa), the Court of Appeals judge Perry and the Circuit Court judge for Ackman think. Everyone else's thoughts at this point are irrelevant at best and distracting at worst. To quote one of my favorite movies, A Few Good Men: "It doesn't matter what I believe. It only matters what I can prove!" Now, if any of those individuals are providing legal points of view, then it's worth listening to -- but again, you have to discount each side for various biases.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aig-american-international-group/msg191850/#msg191850 Some interesting reading re the AIG case going on in the same court as the Sweeney case.

We've been doing that for audio and video. On the audio side you have Pandora, Grooveshark, Spotify, etc. On the video side you have Netflix. But the thing about streaming audio and video is that there are limits to how much bandwidth we need. For audio we don't need quality that is better than 192kbps mp3s. For video we don't need better than 4K. Once we get close to the limits of human perception, the demand growth for bandwidth stops. I don't think he is talking about streaming Video and Audio. What I think might happen (and its probably what merkhet is talking about) is all our devices are like Chromebooks but more than just Data is in the cloud. We have an interface and the CPU/GPU/RAM/HDD/VideoCard/OS/Software(Office/Databases/Games) is all in the cloud. No need to maintain hardware or upgrade it. Interface separates data storage from Hardware layer. Rent it by the month switch to a different configuration/OS at anytime. Yup, that's what I meant -- so it's not so much that we haven't already created dumb terminals (out of our TVs, for sure) -- rather the number of dumb terminals that we have will increase.

I suspect that if we had good enough and consistent enough bandwidth, our computers, tablets, etc. could become terminals such that we begin to stream things that were once localized. That would probably require substantial bandwidth capacity.

Looks like there's a Legal Update call w/ Richard Epstein tomorrow @ 11am EST

If that was a second bailout, that's funny, because Treausry didn't have the authorization to engage in a second bailout...

This is an unfortunate wrinkle. The hedge funds involved here (Pershing Square, Icahn, Paulson & Co., Perry Capital, etc.) have the necessary funds to influence the political process -- but unfortunately, they're pretty unsympathetic victims in the media and political landscape. Interestingly enough, I found the following on Twitter. Too bad I don't have a Politico Pro subscription.

Congratulations, Parsad!

Yea, if that actually happens. It's looking a little shaker than it did earlier this summer. http://www.economist.com/news/business/21621777-lobbying-over-comcasts-bid-create-cable-tv-behemoth-coming-head-tying-up-cable?zid=292&ah=165a5788fdb0726c01b1374d8e1ea285

Except, thus far, no one has indicated that this is an acceptable goal -- I can't recall anyone in either party who wants there to be a giant nationalized mortgage insurance arm. Remember, this would mean that the government is explicitly the backstop for all mortgages in the country. Are you referencing the Slattery case? I'm not that familiar with it, but it might be applicable. (1) I don't think so -- as I stated above, I don't think anyone actually wants a nationalized mortgage backstop. (2) I believe so, and I think discovery in the Judge Sweeney case will show this.

If the shareholders lose all the cases, the result would then be that F&F remain under the control of the government. However, that creates some problems: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg191161/#msg191161 Unless you believe that the equilibrium position of the mortgage housing market is perpetual nationalized mortgage insurance, then they'll have to deal with the private shareholders at some point. I believe that this is what Berkowitz saw when he started to purchase the preferreds.

Thanks for this. As a white dude (albeit one of a not-so-priveledged upbringing) and as a biker, this article definitely had a bit of... resonance to it. It's probably one of the best things that I have read all year. It's delineates the differences of perspective without making anyone feel demonized.

I suspect that some of the differences of opinion here emanate from a similar concept as the following http://qz.com/257474/what-riding-my-bike-has-taught-me-about-white-privilege/

So I re-read the Continental Western response to the Motion to Dismiss in the Iowa District. This will be the next catalyst, up or down, for the companies. In this particular case, Treasury & FHFA moved for on a Motion to Dismiss on a facial challenge, which means that the Court takes, for the purposes of a motion to dismiss, the factual allegations made by Continental Western as true. Meaning that (1) FHFA acted arbitrarily and/or illegally and (2) FHFA was acting at the behest of Treasury. The upcoming order should rest heavily on whether HERA's 4617(f) claim bars any and all claims against FHFA and Treasury and/or that no one has standing to sue based on actions originating from HERA, as Judge Lamberth's opinion so audaciously states. I personally think that this has a good case of going our way, but, as has been my common disclaimer at this point, I thought that about the Perry case too. 2014-08-29_Continental_Response_to_Defendants_Motions_to_Dismiss.pdf

I read that a while back. In my opinion, the main defect in their reasoning stems from the application of the entire fairness test, which is a two-pronged test that requires: (1) fair dealing, and (2) fair price The first prong usually requires that there was an arm's length transaction, which I'm not sure that the government can prove in the case of the Third Amendment. Specifically, it's difficult to use the stock price of the deal at the time, as you point out, given that it was trading at a depressed multiple of the earnings power of the companies. If the Third Amendment is a "Taking" then the government must pay you for what it "took." That would be the key consideration -- and the question would then turn on whether they use stock price or if they use liquidation price -- which turns on whether there was a de facto liquidation. If you think about it, they have basically "liquidated" the equity of the company over five years (Net Worth Sweep and Capital Erosion from 2013 to 2017) and are in the process of running off the portfolio. (Usually, it's the other way around.) My sense is that what they "took" was the natural evolution of things as you wound down the company. Of course, I own preferreds, so I'm possibly biased in this regard.

I saw that! Thought it was pretty funny.

A few weeks (GM) versus a few years (F&F) is pretty different.

I have so much respect for Tepper for standing up for himself on that one. I think the Giving Pledge is a great thing, but it's also a personal choice.

I see what you mean now. I mean, I clearly disagree, but I understand what you mean. I suspect that if what you say is true, then there was no point to continue letting the shares trade. Unless these are trading sardines, of course. :)

Can you expand on that a little bit? There are many ways to go with what you're saying, and I just want to make sure that I'm understanding your point. Why was the value of the shares $0? Because there were losses at one point in time? Because there was negative equity at one point in time? Just trying to figure out what you're saying.

That might be a good legal argument but it is financially naive. But for emergency financing, the companies would have entered bankruptcy in 2008, potentially Chapter 7 as they would have rapidly run out liquidity to even keep the lights on. You keep talking about 2008, and I can't understand it. If you're a doctor, and you save a person's life, are you then entitled to murder them later? We are talking about what happened in 2012. No one needed emergency funding in 2012.

I'm left wondering if he has left the door open, or as least provided a strong hint, to plaintiffs to challenge HERA, in its entirety, on constitutional grounds. Berkowitz apparently thinks so. I've attached a letter from Berkowitz, and the notice that Perry will be appealing. http://online.wsj.com/articles/hedge-fund-firm-perry-capital-files-appeal-of-fannie-freddie-decision-1412284219?tesla=y&mg=reno64-wsj 2014-10-02_Perry_Notice_of_Appeal.pdf 2014-10-01_Fairholme_Letter_to_Shareholders.pdf

That's part of the actual legislation here -- http://www.law.cornell.edu/uscode/text/12/1455 12 USC 1455 (l)(1)© My sense is that the preferred is much safer than the common. The Berkowitz solution actually left the run-off for the common stock & Treasury's warrants. I think Blackstone's presentation would leave very little for the common shareholders. There'd basically be about $60 billion for the private preferred and common stock, and you'd probably hand $33 billion over to the preferred shareholders.

Perhaps -- take a look at this graphic I pulled together outlining quarterly net income and shareholder equity prior to and after the Third Amendment. Even focusing on the first three quarters (and they likely knew how 3Q was shaping up by 8/2012) you can pretty clearly see that things were turning a corner. I don't think they really needed the funding commitment anymore, but I suppose reasonable minds can disagree on that. Irrespective of the above, what purpose does it serve to keep Fannie & Freddie around in conservatorship? And the question for me isn't whether it's a perfectly reasonable deal for FHFA to take -- the question for me boils down to the following: FHFA was tasked with putting F&F into a solvent position. Given that this was their statutory authority, does it exceed their authority to put in an Amendment that prevents capital build-up? My guess is yes -- but Lamberth's guess was no, and for now, that's what matters.