merkhet

That's what I mean by pooling. All the net profits coming in (and the capital reserve) are being diverted to the top of the equity structure. The only reason equity would get nothing in a future liquidation is because the government refused to allow for a capital build and also took away existing Net Worth. I draw a distinction between 2008 and 2012. I suspect that people are more okay with GM and Chrysler because the world was ending. In 2012, the world wasn't ending -- it's just that F&F were seen as profitable and a possible piggy bank. Even aside from that, I still don't know where you would get $125 billion to $500 billion of capital to start a new securitization mechanism.

Well, keep in mind, though, that my analysis is the same now as it was 48 hours ago -- so... there's that. Footnote 20 is rather interesting in how bad it is. So he references Section 4617(b)(2)... ...as an indication of the broad power of Conservatorship, but ignores Section 4617(d), which is literally two paragraphs down.

Former corporate lawyer -- fat lot of good it's done me in the last 48 hours though, as I thought Perry was going to win this one. I addressed some of your points in my post above. A sweep might be justified, but that doesn't mean there isn't a Taking. In fact, it's the opposite -- if it's not justified, it'll be vacated. If it is justified, it demands payment. So the ripeness turns on whether there is a de facto liquidation happening. If you're Lamberth, and you specifically ignore the fact that the Sweep not just sweeps away profits but also Net Worth (and that there's an interaction between profits and Net Worth), then you might not think there's a liquidation happening -- Fairholme's brief in the Court of Federal Claims specifically points this out. In other words, but for the Sweep, the companies would have built a combined amount of capital equal to about $188 billion -- by both taking away that capital build-up and taking away the existing capital through the Capital Erosion provisions, the companies are in a de facto liquidation. Thus ripeness. Washington Federal's case specifically, and wryly, points out the Treasury would prefer to delay the ripeness until the statute of limitations tolls.

Zach, here's my thoughts on the opinion, as promised. Snark Note: He cites 5 U.S.C. Section 702 a bunch of times, but he should have cited 5 U.S.C. Section 706. Shows that he (and his clerks) put a lot of care into this. There is a statute, called the Administrative Procedure Act, that delineates how administrative agencies are supposed to go about their business. (Section 706). In that statute, there are instructions on how to review administrative procedures, one of which is that actions cannot be "arbitrary and capricious." Lamberth believes that HERA Section 4617(f), which states that courts cannot restrain "the exercise of powers or functions of [FHFA]," meant to prevent courts from exercising the "arbitrary and capricious" or rather that Congress intended to provide FHFA with rights that can be exercised both arbitrarily and capriciously -- I suspect that this is wrong. Therefore, the only question to him is whether FHFA exceeded its statutory authority and not whether, while within its statutory authority, it acted arbitrarily and capriciously. Lamberth believes that just because there's an exemption that says Treasury's right to "holding securities, exercising rights received in connection with or selling any obligations or securities" was exempted from the sunset provision of 2009 doesn't mean that Treasury doesn't have other rights that it can still exert -- I suspect that this is wrong too. This would require Congress to have intended to exempt other rights but also intended not to expressly put them into the statute. (In this case, the question is whether the right to amendment by mutual assent is a right under Section 1719(g).) Moreover, Lamberth goes on to say that the Third Amendment doesn't constitute a purchase of securities. His reasoning for this is that "Treasury neither granted the GSEs additional funding commitments nor received an increased liquidation preference." Of course, those are not the only ways that you can purchase a security -- but he seems to ignore that. Here, the companies DID give up something in exchange for the relief of the 10% dividend, and what they gave up with 100% of the profits. (Alternatively, you can argue that they gave up their Net Worth as well because of the Capital Erosion section of the Third Amendment -- requiring Net Worth to go to zero.) This is only true if arbitrary and capricious is off the table, which I don't think that it is. Lamberth talks considerably about how "Notwithstanding the plaintiffs’ perspective that the Third Amendment was a “one-sided deal” favoring Treasury, the amendment was executed by two sophisticated parties, and there is nothing in the pleadings or the administrative record provided by Treasury that hints at coercion actionable under § 4617(a)(7)." Well, yea, that's because Lamberth did not allow for discovery. Judge Sweeney recognized this when she said that the only evidence lies within the defendant's records. Bullocks. He makes absolutely no mention of the Capital Erosion aspect of the Third Amendment, and just because something is immensely profitable does not mean that it cannot be in liquidation. He even quotes a case from the circuit saying that the conservator must "take actions necessary to restore a financially troubled institution to solvent" -- but the Capital Erosion specifically goes against that! This whole section is predicated similarly to 3(A)(1) in saying that Congress intended that no one could sue for FHFA for wrongdoing done by FHFA. "Derivative suits largely exist so that shareholders can protect a corporation from those who run it—and HERA takes the right to such suits away from shareholders." I did find this aspect of his opinion interesting though: "It is a slippery slope for the Court to poke holes in, or limit, the plain language of a statute, especially when, as here, the plaintiffs have not asked the Court to weigh in on the statute’s constitutionality." He then talks about no conflict of interest between FHFA & Treasury, but of course, there's no discovery so who would know whether there was or not? -- As for the Takings stuff, it seems like Judge Sweeney disagrees here, because in her Order on Motion for Discovery, she specifically writes the following:

I mean, I think all those things that you point out are true and add to the problem, but I think there's more to it than that. The loans that the banks want to own are the ones with the lowest risk. I think they'd happily hold a 30-year mortgage where the buyer earns $500,000 annually and bought a $250,000 home. There's practically no chance that such a buyer will end up defaulting. The question is what happens when you start moving down the credit risk profile. Even if you're a national bank, like say Bank of America, and you can spread your risk around geographically, it's not in your interest to subject yourself to idiosyncratic credit risk if you can avoid doing so. Bank of America doesn't want to wake up one day and realize that it somehow ended up with crappier mortgages than Well Fargo -- and the way to deal with that is through a securitization mechanism -- ergo, an insurer. So now the question is who should act as the insurance. (1) Can Fannie & Freddie continue to provide their services as a nationalized entity? Well, sure, but that means that there's no probably no shot of private capital coming in to fill the hole. Think about it this way, if I'm a bank, do I want to own F&F securitized loans with the, at this point, explicit backing of the federal government? Or do I want to own Private JoeCo securitized loans? I'm probably going to want to own the F&F securitized loans -- and the only way that JoeCo can compete is by doing what insurance companies do -- under-reserving and/or pricing incorrectly. (2) Okay, so let's say we shut down Fannie & Freddie for future loans and put them into run-off and turn the market over to the JoeCos. What does this mean? This is basically the Corker/Warner proposal, right? Well, as I pointed out to constructive, if you put Fannie & Freddie into run-off and/or receivership, what justification do you have for pooling the excess funds at the very top of the equity structure? After all, there is no solvency risk at this point. The government preferred has been repaid and the obligations of the companies continue to be met. This basically proves the Takings Claim right off the bat. Assume you do end up pooling the excess funds at the top of the equity structure and manage to screw the private preferreds. Then what happens? Well, the private capital that you're expecting to fund the JoeCos thinks to itself, you know, if I run into temporary trouble, what's to keep the government from nationalizing me as well and doing the exact same thing to me that they did to Fannie & Freddie? And think of the amount of capital that you'd need to sustain a $5 trillion mortgage market. The Pershing Square deck indicates that you'd need about $500 billion, but I think that's overstating it. You'd probably need at least $250 billion at a 5% ratio or $125 billion at a 2.5% ratio -- and you'd have raise that amount from scratch for a startup with absolutely no track record of success. Good luck with that. So even in the private JoeCos version of the world, you'd be better off re-capitalizing Fannie & Freddie and possibly breaking them up into smaller pieces. (I personally think the Berkowitz proposal is pretty good.) And, again, if that's true, how do you recapitalize them and attract private capital to them when you have changed the rules on the previous owners in the middle of the game?

And yet, usually, in a receivership, excess funds above and beyond what are owed to creditors go to the equity structure -- they don't pool at the very top of the equity structure, as seems to be contemplated by the current situation. That site is particularly polarizing. That said, if Maxine Waters really thinks that Judge Lamberth has misconstrued Congressional intent, then she should come out and say that in the public... after the mid-terms.

Agreed. We would probably adapt to 15% to 20% rates on housing. However, between 4% rates and 20% rates is a destabilization of the economy and lower housing prices, which affects the average American household, which uses their home as a form of savings. Zach, I think you're mostly right, and I'll provide my thoughts on the memorandum opinion tomorrow.

Moreover, the Democratic administration will soon realize the following problem from that same article: http://www.ft.com/cms/s/0/ad13e938-4290-11e4-847d-00144feabdc0.html#ixzz3EwrEdix5 Good luck doing that without at least some sort of financial backstop. Private markets will essentially perform an adverse selection issue for insurance -- the healthiest borrowers will get mortgages and everyone else will get nothing. I mean just look at how stringent the loan requirements are right now to get a mortgage. Pristine credit. Nothing else will do. This administration literally just went over this with the Affordable Care Act. Same concept. In reverse.

Sort of -- I was just rephrasing. i.e. -- The question isn't whether any member of the CoBaFF forum thinks that Treasury can shrink F&F and just have the private sector -- the question is whether Treasury thinks that it can do that... Moreover, can they do it by the end of 2017, since, by the very structure of the Third Amendment, the companies will have zero dollars of capital reserve left over -- so any losses will have to be absorbed by the federal government.

Or a better question is -- does Treasury think they can shrink F&F via starvation and the private sector will just take up the slack over time? I suspect that even Treasury knows this isn't possible. Note the Financial Times article showing just how moribund the private sector is even though Treasury is trying its darnedest to get people interested...

Yea, that's my guess as well -- AIG will probably be jettisoned to meet redemptions.

I suppose it just flabbergasts me that everyone is clamoring for a private solution, but there's unlikely to be a private solution without some sort of reform that treats existing shareholders fairly. Actually, now that I think about it, it doesn't seem like Congress is needed at all to figure this out. Treasury remains in full control over when and whether a deal is struck for reform.

Yup, that equates to roughly the amount that the fund went down because of Fannie & Freddie preferred and common stock that he holds.

You're right. He purchased at prices rather below what they were when the preferred shares accounted for 15% of the fund, though I'd add that a non-sale is basically a purchase (ignoring taxes).

This is a difficult one to handicap. And let's be absolutely clear up front, I thought there was a better than even chance that the Perry case was going to result in vacatur of the Third Amendment, and I think Judge Lamberth completely overreached in the opinion. So, you know, take my opinion with a grain of salt at this point. Given that there's a win for all constituencies out there (either releasing Fannie & Freddie or Berkowitz's restructuring plan), I'm just at a loss as to what's taking so long. I dunno if I would say that there has to be more purely because Fairholme placed 15% of his fund into this thing. He's certainly smarter and more experienced than I am, but it's possible for him to be wrong as well. I think for him, he saw the opportunity as being pretty darn similar to the AIG situation. Possibly it was unfathomable that Treasury would find a way to release AIG into the wild and not Fannie & Freddie. One was a much worse actor than the other, and what they do is arguably equally systemically important.

Additionally, let's not forget that the $200 billion that Treasury has received is only slightly more than the $189.5 billion that they put into the companies in the first place. So basically, Treasury is sitting here waiting to earn the full $186 billion of capital reserve $20 billion a year at a time -- so they're trying to earn back their return "of" capital rather than earn a return "on" capital at the moment, if that makes sense. It's rather dumb. Berkowtiz is correct. There is a win for all constituencies. It's just a matter of when and whether all the parties end up seeing it this way.

bmichaud, AIG: http://www.ny.frb.org/aboutthefed/aig/pdf/Recapitalization_Summary_Terms.pdf http://phx.corporate-ir.net/phoenix.zhtml?c=76115&p=irol-newsArticle&ID=1477531&highlight= No securities were outright cancelled. Various things were done to ensure that Treasury was repaid on its investment in the companies. GM: http://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization#363_Sale_of_assets The government loan was converted into 60% of the new common while the unsecured bondholders were converted into 10% of the new common. The original common stock was wiped out, that was because the company was insolvent at the time. I think that it would be unprecedented for them to just wholesale cancel the existing capital structure absent exigency and/or insolvency. If you believe Ackman's presentation (attached), the value of Treasury's warrants is between $165 billion to $342 billion based on various g-fees and a P/E between 12x and 16x. --- morningstar, The problem in my mind is that the way that the Third Amendment (http://1.usa.gov/1mSpE8u) is set up, they erode away the capital of the companies at the same time. In my opinion, this doesn't get enough play in the media. So yes, they are earning a significant amount due to their Net Sweep, but the Capital Erosion robs Peter to pay Paul, since the companies actually need a certain amount of capital to sustain the $5 trillion of existing guarantees on the Fannie & Freddie books. Again, if you believe Pershing Square, the companies require about $186 billion of capital as a reserve and, therefore, what Treasury is really doing is taking away $186 billion of capital and earning what amounts to about 10% return on that capital rather than profiting by taking $165 billion to $342 billion off the warrants and turning the market over to private insurers. Since Congress (and just about everyone else) wants the government to get out of the mortgage business, it's difficult to see how that can happen while there's a near government monopoly on the mortgage market right now -- and it's still hard to see how they can (A) establish a completely new system and (B) entice private money since they've established that in times of crisis, that capital will be treated unfairly. http://www.ft.com/intl/cms/s/0/ad13e938-4290-11e4-847d-00144feabdc0.html 2014-05-05_Its_Time_to_Get_Off_Our_Fannie.pdf

I'd be interested to know where Carney sourced the quote from Sweeney, but I doubt she'll halt discovery in the middle of the process just because of the Judge Lamberth ruling. If there's action at all, I wouldn't expect Congress to move on Fannie & Freddie until after the mid-term elections. I agree with Grenville, though, that the notion of canceling the existing common and preferred equity capital structure would seriously chill investment in the new entities and highly disrupt the current functioning of the mortgage market.

He's a surprisingly charismatic person. Interesting that he says he might be consider filing a suit (re Fannie) if the research leads to an additional investment -- I had no idea he had any sort of a position at all. "We're gonna do a little more research and see where we stand in different courts. There's appeal processes for different lawsuits, so you're not done with this particular court. You also have different courts you're involved in -- the court of settlement claims or something like that. So you have different venues where you haven't brought a suit yet, and that will go on. And you want to see exactly what happened in this particular case in this judge's opinion right here." "Appaloosa has been in plenty of lawsuits and bankruptcies, and, you know, we may get a little more interested in that in some fashion, but we don't have a position big enough to get involved in that fashion."

I would expect the government to respond to the Ackman case by October 28th, 2014, and probably sooner, with a motion to dismiss, since the Ackman case is also in the District Court of the District of Columbia and would be bound by the precedent set by Judge Lamberth.

Zach, (1) You should read the opinion itself. It's better to go direct to the source. (2) Your understanding of the differences is correct. (3) The first catalyst has gone against us, but I don't know that it affects the probabilities of in the Sweeney case -- she's not bound by precedent set in the District Court of DC The strange thing is that the Lamberth decision rests largely on Section 4617(f) barring any relief to the plaintiffs, but valuecfa is correct to point out that Sweeney does not seem to hold the same view. Surprisingly, Lamberth dismissed the APA Claims because there was not a preponderance of the evidence to show that the FHFA acted improperly -- except FHFA specifically did not compile a record to allow for the exposition of evidence in the first place. This is, of course, why Sweeney asked for discovery, because she said she can't make a decision until the evidence is completely out there. Looking forward and reasoning back, the fact that the government refused to provide an administrative record in the first place and then tried to put up roadblocks in the Sweeney case in the second place seem to indicate that something is rotten in the state of Denmark. Otherwise, they'd have just produced the record and been done with it. I wonder if anything precludes Perry from filing its APA case in the Court of Federal Claims to the extent that the Sweeney case uncovers good evidence.

Does eBay now have an incentive to ask users to choose someone other than PayPal? I haven't a clue as to PayPal's cost per transaction -- and whether that's higher or lower than Visa, MasterCard, etc.

Well, the integration is beneficial for eBay -- but is it beneficial for PayPal?

I really wish people would stop filing frivolous lawsuits that have the danger of putting up stupid precedent. The opinion is attached. I think there are a number of replies to this, including: (1) Fannie Mae may not be a government actor, but FHFA is a government actor. Here, FHFA did not evict the homeowners, it was Fannie & Freddie. (The distinction is legally important though practically not.) In the Perry, Fairholme and Ackman cases, they're suing for things FHFA did not things Fannie Mae did. (2) This is judicial dicta -- meaning, it's not binding precedent even in its own court -- much less the District Court of the District of Columbia or the Court of Federal Claims. (3) Additionally, I don't think that the Court realizes that the Conservatorship is actually, so far, not a temporary thing -- the companies have been profitable for two years and there is no indication that the conservatorship will stop. The government has indicated that they view this as a strong part of their case given their inclusion of it against the Fairholme case (indicating that the claims are not ripe for review) but it stretches the boundaries of common sense. ilanit_rubin_v._fannie_mae.pdf

http://online.wsj.com/articles/ebay-to-spin-off-paypal-business-1412075767?mod=WSJ_hp_LEFTTopStories http://www.stockspinoffs.com/2014/09/30/cant-fight-feeling-anymore-years-resistance-ebay-announces-plan-spin-paypal/