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

[tthompson]

On the right, Boston. Small world!

 

I just hope we can rely on Brown's ideology. I really got the feeling that Millett was looking for holes in Olsen, and was quite a bit lighter on the government.

[doughishere]

I was the guy in the grey suit in the front left row. I think we had this conversation there lol. I have the exact same read, except I lean toward Millett being more likely to go against us.

 

Maybe I missed this but is there a time line for their decisions

[merkhet]

I was the guy in the grey suit in the front left row. I think we had this conversation there lol. I have the exact same read, except I lean toward Millett being more likely to go against us.

 

Maybe I missed this but is there a time line for their decisions

 

No deadline. The supplemental briefing is due 7 days from now.

[doughishere]

I was the guy in the grey suit in the front left row. I think we had this conversation there lol. I have the exact same read, except I lean toward Millett being more likely to go against us.

 

Maybe I missed this but is there a time line for their decisions

 

No deadline. The supplemental briefing is due 7 days from now.

 

Must be fun sometimes being a judge. You just get to decide if people's facts and opinions are shit or not....

[deadspace]

For the lawyers on the board. The judges kept harping that even with the short term profits that long term the company could not pay the 10% dividend. The key issue here which the judges couldn't accept is even if the profits were short term they were enough to pay off all the money owed so there would be no dividend.  There was nothing to pay interest on

 

Possibly the worst aspect of the net worth sweep is that no matter how much money treasury got that the "loan" could never be payed off. The senior preferreds can't be called.  I think this is a point that is critical to make.  I'm afraid that if the idea is set up that long term profit is not there to pay the 10% that the case is doomed.  Will this possibly be addressed in a supplement brief at a later date

[merkhet]

I think that's a fact based determination that they will stay away from as an appellate court. Remember, this came up because Judge Lamberth granted a motion to dismiss so I doubt that's going to be an issue.

[deadspace]

I think that's a fact based determination that they will stay away from as an appellate court. Remember, this came up because Judge Lamberth granted a motion to dismiss so I doubt that's going to be an issue.

 

Thanks Merkhet.  It just seems that today's hearing went way beyond just this issues around should the motion have been dismissed and to the Crux of the matter on whether the NWS actually could be considered a taking. 

But ultimately I see the judges job to be to probe these issues  I found they were aggressive in their probing but I'm not sure we can read anything from this as I would think this is a technique that you need as a judge to probe the issues

[Luke 532]

I think Ginsburg is heavily leaning towards plaintiffs...

 

Justice Department lawyer Mark Stern rejected the proposition that the FHFA’s conservation of Freddie and Fannie had veered into a receivership, telling the court the Treasury Department’s financial commitment to the companies is ongoing.

 

“When the third amendment was announced,” Ginsburg said, referring to that portion of the bailout plan that authorized the profits sweep, “Treasury said we’re going to wind this thing down, we going to kill it, we’re going to drive a stake through its heart, we’re going to salt the earth so it can never grow back.”

 

“I don’t remember that language,” Stern deadpanned.

https://beta.finance.yahoo.com/news/fannie-freddie-judges-hear-investor-202447127.html

[merkhet]

I think that's a fact based determination that they will stay away from as an appellate court. Remember, this came up because Judge Lamberth granted a motion to dismiss so I doubt that's going to be an issue.

 

Thanks Merkhet.  It just seems that today's hearing went way beyond just this issues around should the motion have been dismissed and to the Crux of the matter on whether the NWS actually could be considered a taking. 

But ultimately I see the judges job to be to probe these issues  I found they were aggressive in their probing but I'm not sure we can read anything from this as I would think this is a technique that you need as a judge to probe the issues

 

One thing to keep in mind when listening to the audio is that lay people seem shocked that the judges were pretty aggressive in their questioning. That's actually just what appellate judges do.

 

I put it this way -- when my business school friends show up to a party with my law school friends, they are all a little taken aback because all the law school people seem to be arguing with one another. That's... just what they do. They're enjoying it. Lawyers don't get invited to many parties. :P

[merkhet]

I think Ginsburg is heavily leaning towards plaintiffs...

 

Justice Department lawyer Mark Stern rejected the proposition that the FHFA’s conservation of Freddie and Fannie had veered into a receivership, telling the court the Treasury Department’s financial commitment to the companies is ongoing.

 

“When the third amendment was announced,” Ginsburg said, referring to that portion of the bailout plan that authorized the profits sweep, “Treasury said we’re going to wind this thing down, we going to kill it, we’re going to drive a stake through its heart, we’re going to salt the earth so it can never grow back.”

 

“I don’t remember that language,” Stern deadpanned.

https://beta.finance.yahoo.com/news/fannie-freddie-judges-hear-investor-202447127.html

 

Yes, I remember that exchange. I think Ginsburg is pretty solidly on the shareholders' side. My guess is that Brown is also on the shareholders' side, but I would have liked to hear her speak more.

[Luke 532]

I think Ginsburg is heavily leaning towards plaintiffs...

 

Justice Department lawyer Mark Stern rejected the proposition that the FHFA’s conservation of Freddie and Fannie had veered into a receivership, telling the court the Treasury Department’s financial commitment to the companies is ongoing.

 

“When the third amendment was announced,” Ginsburg said, referring to that portion of the bailout plan that authorized the profits sweep, “Treasury said we’re going to wind this thing down, we going to kill it, we’re going to drive a stake through its heart, we’re going to salt the earth so it can never grow back.”

 

“I don’t remember that language,” Stern deadpanned.

https://beta.finance.yahoo.com/news/fannie-freddie-judges-hear-investor-202447127.html

 

Listen closely and you'll hear another one of the judges (not Ginsburg) say "close enough" on what Ginsburg says above.  In other words, she agrees that the Treasury intended to kill it at the time the Third Amendment was announced.  It's subtle but I think it speaks volumes to her line of thinking.  Maybe somebody that recognizes the voice can share if it's Brown or Millett.

Here's the audio: https://app.voicebase.com/autonotes/private_detail/18010741/hash=apyVYWRsammWbmvKlWGSnGqPmGptxWZsaWnEkXGZxGZmxZaWaJZnaGpvnMXG?vbt=8452

[Guest cherzeca]

I think Ginsburg is heavily leaning towards plaintiffs...

 

Justice Department lawyer Mark Stern rejected the proposition that the FHFA’s conservation of Freddie and Fannie had veered into a receivership, telling the court the Treasury Department’s financial commitment to the companies is ongoing.

 

“When the third amendment was announced,” Ginsburg said, referring to that portion of the bailout plan that authorized the profits sweep, “Treasury said we’re going to wind this thing down, we going to kill it, we’re going to drive a stake through its heart, we’re going to salt the earth so it can never grow back.”

 

“I don’t remember that language,” Stern deadpanned.

https://beta.finance.yahoo.com/news/fannie-freddie-judges-hear-investor-202447127.html

 

Listen closely and you'll hear another one of the judges (not Ginsburg) say "close enough" on what Ginsburg says above.  In other words, she agrees that the Treasury intended to kill it at the time the Third Amendment was announced.  It's subtle but I think it speaks volumes to her line of thinking.  Maybe somebody that recognizes the voice can share if it's Brown or Millett.

Here's the audio: https://app.voicebase.com/autonotes/private_detail/18010741/hash=apyVYWRsammWbmvKlWGSnGqPmGptxWZsaWnEkXGZxGZmxZaWaJZnaGpvnMXG?vbt=8452

 

@luke

 

i have yet to listen to the audio, have to find a couple of hours and i have company so...

 

but brown has a distinct soft southern-accented voice, having grown up there.  millet's voice is more straight forward.

[merkhet]

I believe that voice belongs to Judge Brown re "close enough."

[Guest cherzeca]

I believe that voice belongs to Judge Brown re "close enough."

 

@luke

cool that your link took us right to the part of the argument you were wondering about.  i need to tech myself up...

 

i agree with merkhet, it had a softness that seems to be brown, but hard to be sure with all of the laughter

[Luke 532]

I believe that voice belongs to Judge Brown re "close enough."

 

After listening again, coupled with Christian's comment, I agree that it sounds like Brown.

 

If they had to render a decision tonight, I would really like our chances.  And I think the more time that passes the more they will learn about the case and that Lamberth's decision was incorrect.

[merkhet]

I'm re-listening to the audio right now, and I'm adjusting my view of Olson's part a bit. It's not as bad as I initially thought -- though I still think he missed a few great opportunities.

 

At one point, Ginsburg agrees w/ Olson that the way that the net worth sweep is constructed, it would be impossible to put the GSEs in a sound and solvent condition. This is shortly after they say that every cent is leaving the companies and shortly before Ginsburg launches into his hypothetical about whether FHFA may have just been trying to stem the bleeding w/ the NWS.

 

Additionally, Millett's hypotheticals make a little more sense now, because it sounds a lot like she is just testing the various bounds of Olson's repeated assertions that the NWS is, under no conditions, an appropriate action to be taken by the FHFA as conservator.

[Guest cherzeca]

@merkhet

 

noticed that the fake tim howard is quoting you:  https://timhoward717.com/2016/04/15/major-update-perry-oral-arguments/

 

did you know/authorize? 

[merkhet]

Hume saves the day on a few things that Olson dropped the ball on -- for instance, he mentions the Fannie Mae & Freddie Mac projections that show payback by 2019 & 2020. This would counter the fact that the GSEs' 10-Qs mention a dour scenario where they don't envision ever being able to pay back more than the dividend, and it would counter Ginsburg's errant statement that it was (A) only Susan McFarland that thought there was a rosy future and (B) that it was only her recollection post hoc rather than at the time.

 

Judge Millet at one point mentions that "Virginia law for Freddie Mac is different from Delaware law, right? ... I thought that was why this was coming at us from Fannie Mae because that's where you had precedent. You didn't have it from Freddie Mac in Virginia. Am I wrong?" Hume replies that he thinks they're mostly the same in material respects, but this might be something that people want to be a bit wary on -- it's also why I only own Fannie Mae's preferred shares. Preferred has the stronger K claim and is located in the more favorable (and developed) jurisdiction for various claims. I doubt the risk is high, but why run it if you don't have to do so? (i.e. You aren't Berkowitz who needs to sink in tons of capital and needs to spread it around.)

 

My read on how Hume handled this is still the same. He crushed it.

[merkhet]

@merkhet

 

noticed that the fake tim howard is quoting you:  https://timhoward717.com/2016/04/15/major-update-perry-oral-arguments/

 

did you know/authorize?

 

I noticed that. I didn't send it over to him, but I'm not bothered one way or the other by it. This forum, is, after all, publicly accessible. Plus, I shared a similar summary with him via Twitter DM earlier today.

[merkhet]

So it looks like the court gave notice to the parties earlier today that there might be a different statutory bar via 4623, which is why they spent so much time discussing it with Howard Cayne this morning and why they want to have supplemental briefing on 4623.

 

https://www.law.cornell.edu/uscode/text/12/4623

 

As far as I can tell, the argument from the government is that Plaintiffs can't say that the entities are being operated in an unsafe and unsound manner based upon a lack of capital, because the amount of capital required for the GSEs is determined by the FHFA director, which is not reviewable except through 4623. Moreover, the regulator made the regulatory decision to have Treasury's "line of credit" satisfy capital standards -- and that too is not reviewable. It's a clever argument.

 

Millett is noticeably softer on Cayne than she was on Olson, even though she makes the appellant argument to Cayne that this doesn't look like what a conservator is supposed to do and that the GSEs are effectively in this weird limbo situation. Cayne then says that the statutory powers of receivers and conservators are identical but that the receiver has some additional powers later on in the statute.

 

Cayne also brings up the Jump Start bill as saying that they're condoning what Treasury & FHFA did with the Third Amendment by telling Treasury to stay in a holding pattern until 2018. Millett also questions whether Jump Start affects any remedy that might be asked for in this case. Cayne hems and haws a little bit but says that this suggests that Jump Start bars the court from making any change to the attributes of the shares held by Treasury. (Notably, not true -- even Corker said so on CNBC that very day that it wouldn't affect any legal judgment or settlement.) Millett seems unconvinced about it, but it's hard to tell if Cayne was able to put one over on her.

 

Cayne then talks about how there was consideration by exchanging the Periodic Commitment Fee for the Net Worth Sweep. Millett asks how much the PCF would have been, and Cayne responds that the PCF has never been determined. She then asks again whether anyone has any sense of what that would have been worth, and Cayne says that Congress thought it was enough to pass special legislation concerning it.

 

Cayne brings up the idea that maybe this was a bad deal, but this is not an APA case under any arbitrary and capricious standard. The only issue is whether the conservator exercised a power granted by Congress -- which was the power to operate the institutions and enter into contracts. Brown interjects that the issue is whether the power that FHFA was exercising was ultra vires or whether that was the power actually authorized by the statute.

 

Ginsburg then mentions his question about whether there had been a discretionary supervisory action or a reclassification of the capital structure re 4623. And so Cayne basically says that the director didn't make a change within the reclassification grid but rather moved off that grid. Ginsburg then said that if it's not a change within the grid, then it's a discretionary supervisory action -- then Cayne agrees. Millett mentions the idea of submitting supplemental briefs.

[Guest cherzeca]

@merk

 

re 4263..."(b) Scope of review

The Court may modify, terminate, or set aside an action taken by the Director and reviewed by the Court pursuant to this section only if the court finds, on the record on which the Director acted, that the action of the Director was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with applicable laws."

 

wonder why this line of argument is being pursued if it was not in record and noticed in appeal. but anyway, where is the record of fhfa to support determination that gses dont need capital?  sounds like another litigation-based argument by govt.  also, how is this notion that gses dont need capital jive with applicable law, conservatorship duty to rehabilitate and conserve

 

 

[merkhet]

Mark Stern (not Dintzer), as mentioned before, starts off by telling the story of how the world was ending in 2008, so Congress provided very broad powers via HERA despite having taken the language from FIRREA. There is an exchange where Stern mentions that the companies were failing, and Ginsburg mentions that there was some disagreement whether the companies were failing, and Stern mentions that he's talking about 2008.

 

Stern mentions again the imprimatur of approval given by the Jump Start bill, but Ginsburg interjects and asks whether, if the plaintiffs get the relief they're requesting, Treasury would have to sell shares. Stern backs off and demurs. Ginsburg then says "Congress acts by enacting a statute, and Mr. Cayne and you both seem to want to avoid discussing the terms of the statute in any detail, and viewing this from 30,000 feet and looking at the purpose in 2008 and so on but we have to grapple with the terms of the statute."

 

Millett asks "why wouldn't it be ultra vires to say that the one thing we know that the conservator can't do is to adopt a plan by which the regulated entities can never become solvent?" i.e. This doesn't implicate 4617(f). Stern double downs on the idea that there hasn't been a liquidation because the companies are still running. He then goes on and says that there were no good answers on how to proceed with the GSEs, and that they need legislation to wrap things up. Basically saying that this is within FHFA's judgment on how to choose between a bunch of bad choices -- mentioning again the idea of a death spiral.

 

Stern then mentions that we don't get to fight about what was the best choice for the conservator to make, and he says that there were no specific statutory prohibitions that they stepped over the line on. Ginsburg interjects that there are, in fact, limitations by saying that the conservators are supposed to act as necessary and appropriate to conserve and throws in that the government produced an incomplete record. Stern (stupidly, IMO) takes issue with the idea that the record was incomplete, and Ginsburg retorts that new things have come out that show that the record was, in fact, incomplete! There were things that weren't submitted initially. Stern's response was that they opposed the supplement of that record, which seems (to me) not a great response because that's saying that the record was incomplete but... well, we didn't want you to see that. So they go back and forth a bit on whether the administrative record was adequate in this case.

 

Millett says to assume the worst administrative record possible -- like, the administrative record says that we should take all the money now that it's profitable -- could a conservator do that? Stern's response is that a conservator could do that and that nothing that has been produced supports that fact pattern. (Specific choice of words, IMO.)  Ginsburg says, though, that the administration said in 2011 that the GSEs should be wound down, and the NWS is the way to do it. However, they specifically decided not to pull the receivership trigger because they didn't want to deal with the liquidation preference.

 

This is where Stern says that the conservator is allowed to wind down, and Ginsburg pushes back and says that's not how he reads 4617(A)(2) because the word "respectively" is implicit in that section. At the same time, another judge starts to say something, but she doesn't actually get any words out. Would be nice to know which judge and what she was going to say.

 

Ginsburg then has his great quote about killing the GSEs and salting the earth. :)

 

Ginsburg mentions re their choices, "I think they had two alternatives. They could act as a conservator, which they didn't want to do. Or to act as a receiver and move towards liquidation." Millett asks again about whether there is fluidity between conservatorship and receivership, and Millett follows up by asking how we would be able to tell when winding up stops and liquidation begins.

 

Ginsburg then asks about the direct claims (breach of K, implied covenant, etc.) and seems unconvinced with Stern's argument that the succession clause takes those from shareholders. Ginsburg then says that the liquidation claim is not a derivative claim -- agreeing w/ Hume, essentially. Seems to have made up his mind on that one. Millett seems to argue that the claim seems derivative, but Ginsburg then disagrees because the liquidation preference doesn't accrue to the companies, it accrues to shareholders directly.

 

Stern then goes with the argument that shareholders' liquidation preferences haven't been taken away by saying that "what they've got, they've got." Ginsburg then says, "well, what've they got?" Then everyone laughs. Stern hems and haws and says "They've got a lot more than what they would have had without these deals." (Again, notably wrong! But I suspect the laughing showed that.)

[muscleman]

Mark Stern (not Dintzer), as mentioned before, starts off by telling the story of how the world was ending in 2008, so Congress provided very broad powers via HERA despite having taken the language from FIRREA. There is an exchange where Stern mentions that the companies were failing, and Ginsburg mentions that there was some disagreement whether the companies were failing, and Stern mentions that he's talking about 2008.

 

Stern mentions again the imprimatur of approval given by the Jump Start bill, but Ginsburg interjects and asks whether, if the plaintiffs get the relief they're requesting, Treasury would have to sell shares. Stern backs off and demurs. Ginsburg then says "Congress acts by enacting a statute, and Mr. Cayne and you both seem to want to avoid discussing the terms of the statute in any detail, and viewing this from 30,000 feet and looking at the purpose in 2008 and so on but we have to grapple with the terms of the statute."

 

Millett asks "why wouldn't it be ultra vires to say that the one thing we know that the conservator can't do is to adopt a plan by which the regulated entities can never become solvent?" i.e. This doesn't implicate 4617(f). Stern double downs on the idea that there hasn't been a liquidation because the companies are still running. He then goes on and says that there were no good answers on how to proceed with the GSEs, and that they need legislation to wrap things up. Basically saying that this is within FHFA's judgment on how to choose between a bunch of bad choices -- mentioning again the idea of a death spiral.

 

Stern then mentions that we don't get to fight about what was the best choice for the conservator to make, and he says that there were no specific statutory prohibitions that they stepped over the line on. Ginsburg interjects that there are, in fact, limitations by saying that the conservators are supposed to act as necessary and appropriate to conserve and throws in that the government produced an incomplete record. Stern (stupidly, IMO) takes issue with the idea that the record was incomplete, and Ginsburg retorts that new things have come out that show that the record was, in fact, incomplete! There were things that weren't submitted initially. Stern's response was that they opposed the supplement of that record, which seems (to me) not a great response because that's saying that the record was incomplete but... well, we didn't want you to see that. So they go back and forth a bit on whether the administrative record was adequate in this case.

 

Millett says to assume the worst administrative record possible -- like, the administrative record says that we should take all the money now that it's profitable -- could a conservator do that? Stern's response is that a conservator could do that and that nothing that has been produced supports that fact pattern. (Specific choice of words, IMO.)  Ginsburg says, though, that the administration said in 2011 that the GSEs should be wound down, and the NWS is the way to do it. However, they specifically decided not to pull the receivership trigger because they didn't want to deal with the liquidation preference.

 

This is where Stern says that the conservator is allowed to wind down, and Ginsburg pushes back and says that's not how he reads 4617(A)(2) because the word "respectively" is implicit in that section. At the same time, another judge starts to say something, but she doesn't actually get any words out. Would be nice to know which judge and what she was going to say.

 

Ginsburg then has his great quote about killing the GSEs and salting the earth. :)

 

Ginsburg mentions re their choices, "I think they had two alternatives. They could act as a conservator, which they didn't want to do. Or to act as a receiver and move towards liquidation." Millett asks again about whether there is fluidity between conservatorship and receivership, and Millett follows up by asking how we would be able to tell when winding up stops and liquidation begins.

 

Ginsburg then asks about the direct claims (breach of K, implied covenant, etc.) and seems unconvinced with Stern's argument that the succession clause takes those from shareholders. Ginsburg then says that the liquidation claim is not a derivative claim -- agreeing w/ Hume, essentially. Seems to have made up his mind on that one. Millett seems to argue that the claim seems derivative, but Ginsburg then disagrees because the liquidation preference doesn't accrue to the companies, it accrues to shareholders directly.

 

Stern then goes with the argument that shareholders' liquidation preferences haven't been taken away by saying that "what they've got, they've got." Ginsburg then says, "well, what've they got?" Then everyone laughs. Stern hems and haws and says "They've got a lot more than what they would have had without these deals." (Again, notably wrong! But I suspect the laughing showed that.)

 

Have you seen the show "Lie to me"?

OMG we need an expert like that to truly read the minds of Millet and Brown.  :D

[Guest cherzeca]

thanks for all of this merk!  you are doing a great job. i will post after i free up to listen to audio a couple of times.

 

it occurs to me that this case is so difficult for judges because it combines both administrative law and corporate law.  dc circuit ct of appeals judges are more attuned to the former, but it seems by your posts that at least ginsburg has a feel for the economics as well

[merkhet]

Olson's rebuttal comes back strong by mentioning that (1) FHFA & Treasury have worked together, a violation of the statute, because FHFA is supposed to be a fiduciary versus Treasury having a different interest w.r.t. taking care of taxpayers (throwing in a mention that the record is incomplete and a complete record would probably provide more evidence), (2) FHFA said that stockholders would retain residual rights to economic value AND that in that same Q&A, FHFA said specifically that the conservator cannot liquidate the company. Olson says this is a shell game by basically calling itself a conservator but acting as a receiver at the same time. He also throws out the idea that the supervising sponsor of the appropriations bill didn't ratify the Jump Start bill (basically disavowed it?). Olson also throws out a citation to the Samuels case where FHFA says that the companies are net worth insolvent. Finally, Olson mentions again that the record is incomplete, and they are entitled to getting one -- even though what little they already have probably shows that the conservators are violating their statutory duty.

 

Hume's rebuttal was also strong. Hume clarifies that the shareholders have fewer rights under receivership than under conservatorship mentioning again Lockhart's statement that shareholders retain all economic rights. Millett asks if those rights changed at all in the first two amendments, and Hume says no. They were only extinguished in the third amendment. He also ties in the idea that Treasury's consent on dividends going out is no different than the board of directors announcing a dividend given that Treasury controlled the entities via 80% ownership and/or working w/ FHFA. Hume also points to a piece of evidence that is not public which indicates that the PCF value was very small (Exhibit 34). Hume then mentions that appellees now say that the appellants have right to no direct claims, and he mentions that zero courts have ever read statutes that way. Millett asks a few clarifying questions on which claims were direct, and Ginsburg actually answers on Hume's behalf that the direct claims come from the stock certificates. Millett seems to agree with that. Very strong argument at the end that FHFA admits that stockholders have economic rights (thank you Director Lockhart!) but to then say that shareholders can't come into court and protect them raises serious constitutional doubt issues. (i.e. if HERA is read this way, there is a serious challenge as to whether the act is constitutional)