FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[Sunrider]

I've now slogged through this - at first I was a bit worried as she did not agree with plaintiffs re bank supervisory privilege, which for me seemed fairly obvious (but who am I?).

 

Chris/Merkhet - is her argument effectively providing the standard that should be applied to all other privileged documents? If so, then does this not effectively open the floodgates for P counsel to now request each of the remaining documents arguing that their need overrrides the privilege by the 4 criteria she relies on from the other cases she cites? Would it not be highly likely then that she would grant that motion (irrespective of G objecting)? Would that, again, require an in camera review or how would that work? (Thinking positively I would like to believe that the judge foresees this playing out and went this route because she does not want to continue playing this back and forth with government asserting something that can only be verified on a case-by-case basis, and so she set standards that can be met on the basis of the document title and description available to P)?

 

Many thanks!

 

 

Thanks doughishere, some of this is crazy.

 

"The decision to approve the Net Worth Sweep was made by Secretary Geithner on August 16, 2012. [...] The privilege log also indicates that Document 14 was sent by S. Miller to B. Mlynarczyk and M. Stegman on July 30, 2012. [...] Document 14 is undated. Therefore, defendant has not established that this document is predecisional."

 

I mean, if it got sent before it had to have been created before, but I guess lawyers and judges have to allow for time machines, or that documents can be sent that have not yet been created? It's hard to believe legalese is really like this sometimes.

 

predecisional means more than pre or before.  it means that this document contained a discussion that served as the background analysis for the decision.  not the basis for the decision, as that is discoverable (reasons for adopting a course of action are always relevant). but the part of the to and fro that informed the process.  if you claim a privilege, you have to prove the privilege.  that's the govt's burden.

 

in the event, she found with respect to almost all of these docs that even if govt met its burden, Ps need for evidence was greater in balance.

[Guest cherzeca]

@sun

 

"Chris/Merkhet - is her argument effectively providing the standard that should be applied to all other privileged documents? If so, then does this not effectively open the floodgates for P counsel to now request each of the remaining documents arguing that their need overrrides the privilege by the 4 criteria she relies on from the other cases she cites? Would it not be highly likely then that she would grant that motion (irrespective of G objecting)? Would that, again, require an in camera review or how would that work? (Thinking positively I would like to believe that the judge foresees this playing out and went this route because she does not want to continue playing this back and forth with government asserting something that can only be verified on a case-by-case basis, and so she set standards that can be met on the basis of the document title and description available to P)?"

 

great questions.  i was looking for that part of her opinion where she would say, because of the foregoing re the 50 docs i saw in camera, i now hold re the other 11000 docs as follows:...  of course, it's not there.

 

no way does she want to review 11000 docs.  you would think this 50 docs rather intensive review could serve as a statistically significant sample, perhaps for C&K next to argue that all 11,000 docs should be turned over because a hit rate of 50/50 justifies this. indeed, she always found that balancing Ps need for docs resulted in requiring their production.

 

i have to believe that C&K will make this motion soon. she didnt grant any motion re the other 11000 docs because there was nothing asked about them.  C&K smartly made a motion regarding a feasible sample size, tho it did take her months. courts dont grant relief not requested.  so next step is for C&K to request all other docs.  after reviewing the 50 docs they get, they may first focus in on a smaller than 11000 number, perhaps asking for docs that are similar in subject matter to those they have received.

 

[doughishere]

@sun

 

"Chris/Merkhet - is her argument effectively providing the standard that should be applied to all other privileged documents? If so, then does this not effectively open the floodgates for P counsel to now request each of the remaining documents arguing that their need overrrides the privilege by the 4 criteria she relies on from the other cases she cites? Would it not be highly likely then that she would grant that motion (irrespective of G objecting)? Would that, again, require an in camera review or how would that work? (Thinking positively I would like to believe that the judge foresees this playing out and went this route because she does not want to continue playing this back and forth with government asserting something that can only be verified on a case-by-case basis, and so she set standards that can be met on the basis of the document title and description available to P)?"

 

great questions.  i was looking for that part of her opinion where she would say, because of the foregoing re the 50 docs i saw in camera, i now hold re the other 11000 docs as follows:...  of course, it's not there.

 

no way does she want to review 11000 docs.  you would think this 50 docs rather intensive review could serve as a statistically significant sample, perhaps for C&K next to argue that all 11,000 docs should be turned over because a hit rate of 50/50 justifies this. indeed, she always found that balancing Ps need for docs resulted in requiring their production.

 

i have to believe that C&K will make this motion soon. she didnt grant any motion re the other 11000 docs because there was nothing asked about them.  C&K smartly made a motion regarding a feasible sample size, tho it did take her months. courts dont grant relief not requested.  so next step is for C&K to request all other docs.  after reviewing the 50 docs they get, they may first focus in on a smaller than 11000 number, perhaps asking for docs that are similar in subject matter to those they have received.

 

Its also worth noting that I would expect the Govt to drag their feet on those 11K docs. Why stop now? (Edit: However, Sweeny is getting more irritated. You can sense that.)So this could be 6-8 more months. Also, Im under the impression that this is still discovery...the trial actually hasnt started.

[Sunrider]

Thanks Chris.

 

@doug Yes it still is discovery - the judge put a nice summary of the story to date upfront - basically this is still about whether there should be a trial in the first place. Now we just hope that there is enough in the docs (either the 50 or whichever ones Ps request next) that

(a) allows P to argue convincingly their initial claims so that we get to a trial; and

(b) provides enough ammo for other cases (although I guess the real big one is Perry appeal and that ship may have already sailed... or at least none of what happens in Fairholme next will impact the appeals court ruling ... but may be relevant if they reverse or remand lambeth).

 

I really do hope that it is not wishful thinking what I put in my email but rather that Sweeney is inclined to order that need for evidence trumps privilege on all documents where this can reasonably be inferred from the information given to P, once requested to do so by P.

 

Finally, I think we should all prepare for this to take until well until next year to progress meaningfully - the price may move in between on Perry ruling, further Fairholme motions, etc. However, if I am right that settlement basically is not going to happen (don't see what it would look like) then the ultimate conclusion (short of government folding) is for these cases to play out (possibly with appeals on favourable rulings for P by government) until NWS is declared illegal (whether through breach of contract or takings). I think that is what would be required for the prefs to approximate par (and they'll only get there once GSEs are released and run for the benefit of shareholders again, paying dividends).

 

So, all in all, I guess we're still faced with a 1 - 2 year wait? Chris, Merkhet, others, any guess?

 

Maybe the common will react in price much sooner. However, if I look at the estimates that Chris floated previously, the common may be a ~10x from here even after government dilution. Some of the prefs are in the same range (or were last week) ... so I guess it really comes down to whether you think the prefs are a 'safer' bet in the end ... vs the possibility of getting a material price increase earlier.

 

Thank you everyone for the insightful posts here.

[muscleman]

Thanks Chris.

 

@doug Yes it still is discovery - the judge put a nice summary of the story to date upfront - basically this is still about whether there should be a trial in the first place. Now we just hope that there is enough in the docs (either the 50 or whichever ones Ps request next) that

(a) allows P to argue convincingly their initial claims so that we get to a trial; and

(b) provides enough ammo for other cases (although I guess the real big one is Perry appeal and that ship may have already sailed... or at least none of what happens in Fairholme next will impact the appeals court ruling ... but may be relevant if they reverse or remand lambeth).

 

I really do hope that it is not wishful thinking what I put in my email but rather that Sweeney is inclined to order that need for evidence trumps privilege on all documents where this can reasonably be inferred from the information given to P, once requested to do so by P.

 

Finally, I think we should all prepare for this to take until well until next year to progress meaningfully - the price may move in between on Perry ruling, further Fairholme motions, etc. However, if I am right that settlement basically is not going to happen (don't see what it would look like) then the ultimate conclusion (short of government folding) is for these cases to play out (possibly with appeals on favourable rulings for P by government) until NWS is declared illegal (whether through breach of contract or takings). I think that is what would be required for the prefs to approximate par (and they'll only get there once GSEs are released and run for the benefit of shareholders again, paying dividends).

 

So, all in all, I guess we're still faced with a 1 - 2 year wait? Chris, Merkhet, others, any guess?

 

Maybe the common will react in price much sooner. However, if I look at the estimates that Chris floated previously, the common may be a ~10x from here even after government dilution. Some of the prefs are in the same range (or were last week) ... so I guess it really comes down to whether you think the prefs are a 'safer' bet in the end ... vs the possibility of getting a material price increase earlier.

 

Thank you everyone for the insightful posts here.

 

 

Or a Trump administration.

If Obama has the average person's IQ, he would announce success as the 100 Bn worth of warrant. Why let Trump do it?

 

Or if he does not even have this kind of IQ, Trump will likely do it.

 

 

 

[TwoCitiesCapital]

 

Maybe the common will react in price much sooner. However, if I look at the estimates that Chris floated previously, the common may be a ~10x from here even after government dilution. Some of the prefs are in the same range (or were last week) ... so I guess it really comes down to whether you think the prefs are a 'safer' bet in the end ... vs the possibility of getting a material price increase earlier.

 

Thank you everyone for the insightful posts here.

 

I think the case for takings from the preferred is more clear given that we're paying dividends on the gov't preferred, but none of the others. There's also the contractually-owed par value and whatever minuscule chance of the concept of "accrued dividends" to be paid.

 

The real value in the preferred shares for me is the optionality in the likely recapitalization where they would be converted into equity capital. If preferred shares are converted to common at par, you get the possibility to double-dip with preferred shares going up 10x, or more, and then converting into common at some fixed ratio. I imagine that the common will have a whole lot more gas in them following the clearing up of the uncertainty surrounding the recapitalization and what the pro-rata EPS wil be so there may be a good chance of supercharging returns on the common simply by owning preferred. 

 

 

[Guest cherzeca]

@sun

 

"Maybe the common will react in price much sooner. However, if I look at the estimates that Chris floated previously, the common may be a ~10x from here even after government dilution."

 

i still believe that if nws is invalidated (not just that there is a remand for trial), you are looking at 10x for common after warrant dilution, but before taking into account need for recapitalization. how much of a depressant that has on the stock i cant tell.

 

i do agree that if there is a successful outcome from perry appeal, continuing to stay long with preferreds may make more sense than common...common may make more sense for a trade depending on price.

[Mephistopheles]

So I'm a bit confused. I thought the motion was granted in full. Doesn't that mean that the Plaintiff's lawyers already have access to the 11,000 documents, or only the 50?? I thought the debate was whether any of those will be unsealed for the public or not. Sorry for such a naive question...

[BeerBBQ]

What's up with the intervenor? Now appealing decision to Supreme Court. What is the point in intervening. What is he trying to accomplish?

[hardincap]

So I'm a bit confused. I thought the motion was granted in full. Doesn't that mean that the Plaintiff's lawyers already have access to the 11,000 documents, or only the 50?? I thought the debate was whether any of those will be unsealed for the public or not. Sorry for such a naive question...

 

see cherzeca's post above

 

anyone else think we may be assuming too much about what these docs contain? granted the govnt has acted as if it contains damning information but we dont know until we know

[Guest cherzeca]

So I'm a bit confused. I thought the motion was granted in full. Doesn't that mean that the Plaintiff's lawyers already have access to the 11,000 documents, or only the 50?? I thought the debate was whether any of those will be unsealed for the public or not. Sorry for such a naive question...

 

see cherzeca's post above

 

anyone else think we may be assuming too much about what these docs contain? granted the govnt has acted as if it contains damning information but we dont know until we know

 

i have no clue what is in the docs.  but i do know that if there is remand in perry for a full admin record, treasury will have to put together a record that is now subject to intelligent scrutiny by Ps.  admin record=everything that was considered by agency in connection with decision (in this case, to adopt nws). so in theory Ps can ensure that the admin record contains info that treasury would not want to include.  if perry remand also gives guidance as to what would and would not be an appropriate basis upon which to adopt nws, this "full" record could be very damaging to treasury.

 

separate question for merk/steve/others:  if fhfa is not the govt when acting as conservator, does it still need to produce an administrative record as to what fhfa considered?

[doughishere]

http://www.foxnews.com/opinion/2016/10/04/john-yoo-ultra-secret-obama-white-house-ignores-our-constitution-again.html

 

John Yoo: The ultra-secret Obama White House ignores our Constitution (again)

 

[Steve_Berk]

I may be completely bungling my answer to this question, but since part of the discovery requires a factual inquiry about whether the FHFA was improperly directed by the Treasury, it would seem perverse if they could avoid discovery and the production of an administrative record by simply claiming that they are acting as the conservator and not the government. So I would guess that since that are an agency, and the core question is whether in these circumstances they were acting improperly, they would have to produce. The only way that I could imagine that they could avoid this is if the court were to somehow conclude that the FHFA was not acting as the govt--and if they can conclude that without asking for a full record, then not sure this question matters.

 

Chezerca:

separate question for merk/steve/others:  if fhfa is not the govt when acting as conservator, does it still need to produce an administrative record as to what fhfa considered?

[Luke 532]

Gretchen Morgenson, Pulitzer Prize winner, has another GSE article out...

 

http://mobile.nytimes.com/2016/10/05/business/court-orders-us-to-release-documents-on-mortgage-giants.html?_r=0&referer=http://gselinks.com/

[Guest cherzeca]

I may be completely bungling my answer to this question, but since part of the discovery requires a factual inquiry about whether the FHFA was improperly directed by the Treasury, it would seem perverse if they could avoid discovery and the production of an administrative record by simply claiming that they are acting as the conservator and not the government. So I would guess that since that are an agency, and the core question is whether in these circumstances they were acting improperly, they would have to produce. The only way that I could imagine that they could avoid this is if the court were to somehow conclude that the FHFA was not acting as the govt--and if they can conclude that without asking for a full record, then not sure this question matters.

 

Chezerca:

separate question for merk/steve/others:  if fhfa is not the govt when acting as conservator, does it still need to produce an administrative record as to what fhfa considered?

 

yes that was my thought too.  while treasury might have some 'damaging" evidence to produce in an admin record, fhfa would have very important info to put in a record to show that it met (or did not meet) whatever standard the perry appeals ct might come up with for a C to meet, assuming remand

 

EDIT:  put another way, perry may just vacate the govt motion to dismiss that lamberth granted, and so we are off to discovery.

[merkhet]

Notes from today's call:

 

The United States District Court of DC has heard 308 cases, and we've got 303 opinions. Really should be any day now.

 

Six key legal issues to look for in Perry:

 

(1) Whether FHFA exceeded its statutory authority by failing to preserve & conserve assets

(2) Whether FHFA was acting under the direction/supervision of Treasury

(3) Whether Treasury exceeded its authority by exceeding the sunset provision

(4) Whether there was a breach of contract on the dividend stopper

(5) Whether there was a breach of the implied covenant of good faith and dealing

(6) Whether there was a breach of fiduciary duty

 

What are the possible damages for breach of contract?

 

(1) Expectancy, put the non-breaching party in the same place it would have been without a breach

(2) Reliance, out of pocket costs with some subtraction

(3) Restitution, the benefits received by the breaching party minus benefits received from non-breaching party (like dividends)

 

NOTE: It's possible that not all preferred shares would get paid out the same amount. If you never had dividends, you'd get closer to par value. Unclear though.

[muscleman]

 

 

http://gselinks.com/Court_Filings/Fairholme/17-1015-0001.pdf

 

Michael Sommons appealed Sweeney's denial of motion to intervene. I wonder if this guy works for the government.

merk and cherza, how likely do you think the appeals court will hear from him?

 

[hardincap]

Thompson speculated that one of the judges is writing a dissenting opinion.  Hopefully it's millet not brown

[doughishere]

Notes from today's call:

 

The United States District Court of DC has heard 308 cases, and we've got 303 opinions. Really should be any day now.

 

Six key legal issues to look for in Perry:

 

(1) Whether FHFA exceeded its statutory authority by failing to preserve & conserve assets

(2) Whether FHFA was acting under the direction/supervision of Treasury

(3) Whether Treasury exceeded its authority by exceeding the sunset provision

(4) Whether there was a breach of contract on the dividend stopper

(5) Whether there was a breach of the implied covenant of good faith and dealing

(6) Whether there was a breach of fiduciary duty

 

What are the possible damages for breach of contract?

 

(1) Expectancy, put the non-breaching party in the same place it would have been without a breach

(2) Reliance, out of pocket costs with some subtraction

(3) Restitution, the benefits received by the breaching party minus benefits received from non-breaching party (like dividends)

 

NOTE: It's possible that not all preferred shares would get paid out the same amount. If you never had dividends, you'd get closer to par value. Unclear though.

 

I missed the call. Merk, can you elaborate on that last comment?

[merkhet]

The idea is that if you hold preferreds issued in 2007 that have paid out $4, then maybe you restitution is $21 (par minus dividends) whereas if you hold preferreds issued in 2008 that have never paid out, then your restitution is $25.

[doughishere]

Ahh....thanks....i get what your saying.....not all preferreds are the same despite what people think.

 

Would it not boil down to the callable date for each issue? Seems to me like thats a better way to determine the damages.

 

 

 

Keep in mind folks some preffereds are so old that Bear Stearns underwrote them. All preffereds are not the same.

[muscleman]

What if the preferred was issued in 2003 and paid for four years and then I bought in 2014?

[doughishere]

What if the preferred was issued in 2003 and paid for four years and then I bought in 2014?

 

I think damages are still speculation at this point. There would be a combination of factors and I just dont have the time to go through every class and determine the cash flows associate with each class, IF there even are damages. I know lazy.......

 

 

I know what I own and have an idea of how its going to "payout"....again if they do.

 

Edit: and by class I mean series.

[doughishere]

common is most likely to get 0 damages though....im open to other opinions on that.

[Guest cherzeca]

Thompson speculated that one of the judges is writing a dissenting opinion.  Hopefully it's millet not brown

 

assuming the opinion is "late", the most cogent reason for this would be the time for a judge to read the majority, write her dissent, have majority read dissent and respond to it. 

 

i have thought this has been reason for delay, and i also think it si more likely for G&B to agree than G&M.  all spec of course