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

[merkhet]

Revenge is not a useful move, though. What does attacking Corker at this particular junction and/or in this particular way do for the interests involved? It doesn't undo Jump Start. So what does it actually accomplish? Alternatively, what are they trying to accomplish?

[merkhet]

Moreover, and rather more interesting to me, from the other side, why discredit Jim Millstein via the HuffPo article?

[Guest cherzeca]

That's what I'm getting at though. There's nothing of substance on the legislative agenda at this point, so why would the hard push back through the media? Was this just because Corker has thin skin? Alternatively, what's the point of squeezing Corker in this way? etc.

 

one powerful explanation for many disparate occurrences is that we never have fully left junior high school

[hardincap]

@merkeht are you speculating damage control/scapegoating in anticipation of a possible ruling favoring Ps?

[merkhet]

@merkeht are you speculating damage control/scapegoating in anticipation of a possible ruling favoring Ps?

 

It's all a bit unclear to me right now. I'm not jumping to any conclusions. Will have to think on it a bit. It just strikes me as weird.

[Guest cherzeca]

if i were giving odds, i would give 5-10% affirmance, 15-20% reversal and 70-80% remand.

 

Assuming very conservative (in my opinion) FNMAS prices* in each given scenario, there is still a large margin of value today. *of course, nobody knows what the market will do.

 

10% chance of affirmance = $0.50 FNMAS price

15% chance of reversal = $10.00 " "

75% chance of remand = $5.00 " "

 

(10% * $0.50) + (15% * $10.00) + (75% * $5.00) = $5.30... or 41% upside from the current $3.75 price.

 

It's an elementary way to look at it, of course, but should give a rough idea to those looking for a back-of-the-napkin calculation.

 

w/o quibbling about whether assigned probabilities or assumed price effects are low or high, my takeaway from this is that either fnma was vastly overpriced during the past few years (fnma common was about $4 and fnmas about $10 before lamberth decision), when an appeals ct decision was not close to being rendered, or underpriced now, assuming we agree that the most likely outcome is some form of remand. 

 

i wonder whether the current (low) price levels indicate GSE fatigue on part of market, with only the very committed still long (whether or not strong).  if there is remand, i wonder whether we are underestimating the resulting price effect on the low side, as perhaps then many investors will believe that GSEs have become investable again...and prior price levels will not seem so extravagant by comparison. 

[merkhet]

@merkeht are you speculating damage control/scapegoating in anticipation of a possible ruling favoring Ps?

 

It's all a bit unclear to me right now. I'm not jumping to any conclusions. Will have to think on it a bit. It just strikes me as weird.

 

The other thing that strikes me as weird is that the HuffPo piece talks about how the big bad hedge funds are spending money lobbying on things like Puerto Rico, but then when they take Jim Millstein to task on his alleged hardball w/ Corker's aide, they don't mention that Millstein & Co. is the adviser for Puerto Rico?

 

If I had to speculate, I'd wonder if they were trying to disqualify Millstein as a possible adviser on the GSEs. Recall that Millstein is the only one we've seen that has proposed an idea for the administration to do a recap and release without any legislative action.

[hardincap]

If I had to speculate, I'd wonder if they were trying to disqualify Millstein as a possible adviser on the GSEs. Recall that Millstein is the only one we've seen that has proposed an idea for the administration to do a recap and release without any legislative action.

 

Millstein has been out of the picture for a while now hasn't he? He seems to have dropped off the radar. I wonder what his position on the legal matters is.. If I recall correctly he's no longer a shareholder

[merkhet]

If I had to speculate, I'd wonder if they were trying to disqualify Millstein as a possible adviser on the GSEs. Recall that Millstein is the only one we've seen that has proposed an idea for the administration to do a recap and release without any legislative action.

 

Millstein has been out of the picture for a while now hasn't he? He seems to have dropped off the radar. I wonder what his position on the legal matters is.. If I recall correctly he's no longer a shareholder

 

He was vocal (on Twitter anyway) about three months ago.

 

He sold his position a while back when he was accused of just talking his book while trying to get a deal done for the GSEs. He hasn't been a shareholder in any form since maybe 2013/2014.

[Guest cherzeca]

"Recall that Millstein is the only one we've seen that has proposed an idea for the administration to do a recap and release without any legislative action."

 

if you go to the Urban Institute incubator on GSE reform, you will see his proposal, and a very good proposal from howard, and a bunch of other crap. http://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-finance-reform-incubator

 

alll of this is a 2017-18 discussion

[merkhet]

"Recall that Millstein is the only one we've seen that has proposed an idea for the administration to do a recap and release without any legislative action."

 

if you go to the Urban Institute incubator on GSE reform, you will see his proposal, and a very good proposal from howard, and a bunch of other crap. http://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-finance-reform-incubator

 

alll of this is a 2017-18 discussion

 

They could implement Millstein's proposal tomorrow, if they wanted. The spin of four separate entities from the two GSEs would be quick and would release them from the government preferred.

 

Of course, "if they wanted" is the operative phrase here.

[hardincap]

another bearish exchange:

JUDGE MILLETT:  Well, a fiduciary to whom, because this statute is different, it doesn't say a fiduciary to stockholders, it's a fiduciary serving the best interests of the entity or the agency.

MR. OLSON:  No, I submit that that reference,which is under incidental powers in the statute itself, doesn't provide a conservator to act in its own best interests, or in the interests of --

JUDGE MILLETT:  Well, what does it mean?  What does it mean if it doesn't say they can't take something in the interests of the agency?

MR. OLSON:  Well, that would swallow up all the responsibilities that conservators have had for centuries --

JUDGE GINSBURG:  Well, it does, this is a statute that reads out the fiduciary duty by that provision.

--

JUDGE MILLETT:  Okay.  Just to be clear, so if your -- just to make sure I understand this, your position is if they made this determination that we can't, they're just never going to get to a point of consistent profits then they can't conserve it anymore, that once they've made that judgment they have to go to receivership --

MR. OLSON:  Yes...

JUDGE GINSBURG: So, throughout this period and when the Third Amendment was entered into as I recall the combined portfolios of the two GSEs was roughly $5 trillion, is that right?  Yes.  So, suppose that a supplemented record would reveal that the Treasury and the FHFA were of the view that there's no way to liquidate a $5 trillion portfolio, all of the possible purchasers of pieces of this portfolio could not muster $5 trillion, so we're going to have to wind it down till we get to a stage where it's practical to liquidate, and that will happen assuming they don't make profits that no one expects them to make, that will happen with this sweep, at least that way it'll happen within a few years and then we'll be able to liquidate.

...

JUDGE GINSBURG:  And so, if we fully explore that, if you get an opportunity fully to explore that I'm saying isn't it possible that one of the things one could turn up is an entirely lawful explanation?  Because liquidation at that scale was not practical, and that only by winding it down to a practical scale could they ever appoint themselves receiver

 

here m and g seem to believe that the nws could constitute conservator action if they believed both companies were going to hemorrhage capital and/or the portfolio was just too big to liquidate. G cites 10Qs as supporting evidence for this, as it basically said "we have no future"

 

these exchanges make it difficult for me to believe the judges will order reversal on apa

[Guest cherzeca]

another bearish exchange:

JUDGE MILLETT:  Well, a fiduciary to whom, because this statute is different, it doesn't say a fiduciary to stockholders, it's a fiduciary serving the best interests of the entity or the agency.

MR. OLSON:  No, I submit that that reference,which is under incidental powers in the statute itself, doesn't provide a conservator to act in its own best interests, or in the interests of --

JUDGE MILLETT:  Well, what does it mean?  What does it mean if it doesn't say they can't take something in the interests of the agency?

MR. OLSON:  Well, that would swallow up all the responsibilities that conservators have had for centuries --

JUDGE GINSBURG:  Well, it does, this is a statute that reads out the fiduciary duty by that provision.

--

JUDGE MILLETT:  Okay.  Just to be clear, so if your -- just to make sure I understand this, your position is if they made this determination that we can't, they're just never going to get to a point of consistent profits then they can't conserve it anymore, that once they've made that judgment they have to go to receivership --

MR. OLSON:  Yes...

JUDGE GINSBURG: So, throughout this period and when the Third Amendment was entered into as I recall the combined portfolios of the two GSEs was roughly $5 trillion, is that right?  Yes.  So, suppose that a supplemented record would reveal that the Treasury and the FHFA were of the view that there's no way to liquidate a $5 trillion portfolio, all of the possible purchasers of pieces of this portfolio could not muster $5 trillion, so we're going to have to wind it down till we get to a stage where it's practical to liquidate, and that will happen assuming they don't make profits that no one expects them to make, that will happen with this sweep, at least that way it'll happen within a few years and then we'll be able to liquidate.

 

here m and g seem to believe that the nws could constitute conservator action if they believed both companies were going to hemorrhage capital and/or the portfolio was just too big to liquidate. G cites 10Qs as supporting evidence for this, as it basically said "we have no future"

 

these exchanges make it difficult for me to believe the judges will order reversal on apa

 

good work hardincap.

 

as i recall, there is another point in the fiduciary discussion where millett points out that the court has had prior experience with instances where there are conflicting fiduciary duties, so i dont think the court indicated that fhfa did not have a fiduciary duty as conservator, which is fhfa's position. the judges have to figure out what the best interest of agency language means, and the fdic act will give it some guidance there, and that law is not particularly favorable to govt (see krimminger's amicus brief)

 

olson could have been stronger here. the language was lifted from fdic act where fdic is funding, so it made sense for fdic to be able to act in its interests if debtor was insolvent (so as to minimize its losses when fdic resolves debtor by arranging a transfer of deposits). but here the agency, fhfa, is not the funder, so even the HERA statute doesn't imply that fhfa can act in best interests of treasury, the funder. olson should have made clear that agency does not equal treasury.

 

as to the liquidation discussion with ginsburg, there is another point where he agrees with olson that you can never get to safe and sound with nws, which is what conservator duty is.

 

so there are conflicting snippets in the entire oral argument.  the big question is how the judges resolve all of this when they go back to the briefs and instruct their clerks to do their research.

 

ginsburg is a great judge, insofar as he can push each side with the best of the other side's argument.  where he ends up is not clear, but my sense is that it wont be for affirmance.

 

edit:  moreover, ginsburg makes a big point about the case, overton park, which calls for a complete administrative record.  going for remand to supplement seems to be clearly what makes ginsburg most comfortable. you will remember ginsburg giving treasury counsel a hard time about treasury salting the earth.  makes me think that if there is remand, ginsburg may layer on a standard of review which requires fhfa to show independence from treasury, which ginsburg makes clear has been looking to wind down GSEs while fhfa was publicly saying (eg in its regulations) conservatorship was to rehabilitate.

 

but i understand your point, hardincap, which is you dont see reversal.

[hardincap]

"there is another point where he agrees with olson that you can never get to safe and sound with nws, which is what conservator duty is."

 

that part confuses and troubles me the most. how can g believe that and also believe "one of the things one could turn up [from admin records] is an entirely lawful explanation [of the nws]... because liquidation at that scale was not practical, and that only by winding it down to a practical scale could they ever appoint themselves receiver" Olson made a grave mistake by replying "I suppose its possible".. instead of pointing out that you can only wind down to practical scale as a receiver not conservator

[muscleman]

"there is another point where he agrees with olson that you can never get to safe and sound with nws, which is what conservator duty is."

 

that part confuses and troubles me the most. how can g believe that and also believe "one of the things one could turn up [from admin records] is an entirely lawful explanation [of the nws]... because liquidation at that scale was not practical, and that only by winding it down to a practical scale could they ever appoint themselves receiver"

 

I think he is trying to play both sides and see what the other side would say.

The other assumption is that Ginsburg told Millet to play for the government's side and himself playing for the P's side and let Brown be a neutral judge, so Brown didn't talk much during the whole session.

[Guest cherzeca]

"there is another point where he agrees with olson that you can never get to safe and sound with nws, which is what conservator duty is."

 

that part confuses and troubles me the most. how can g believe that and also believe "one of the things one could turn up [from admin records] is an entirely lawful explanation [of the nws]... because liquidation at that scale was not practical, and that only by winding it down to a practical scale could they ever appoint themselves receiver" Olson made a grave mistake by replying "I suppose its possible".. instead of pointing out that you can only wind down to practical scale as a receiver not conservator

 

agreed.

 

there was discussion, however, of the whole notion of "winding down", which the treasury admits is the effect of the NWS, and which the statute refers to in the context of receivership.  i believe this was when treasury argued that the winding down power was that of both conservator and receiver, and ginsburg interjected that he thought the world respectively was implicit (ie winding down a receiver only function).  but if my recollection is correct, this exchange was at the behest of ginsburg questioning DOJ, not olson being effective

[Steve_Berk]

Here it is:

 

MR. STERN: Well, it's not a liquidation, and the

statute, I mean, first of all, the statute specifically

contemplates, like, the wind down as being a power that can

be asserted, like, in the conservatorship, you know. But

it's, like, what --

 

JUDGE GINSBURG: Does it? Where is that?

 

MR. STERN: It's in, it's 4617(a)(2), which allows

the conservator as well as the receiver to take actions for

the purposes of reorganizing, rehabilitating, or winding up

the affairs of the GSEs.

 

JUDGE GINSBURG: Yes, well, as I read that, it's,

the word respectively is implicit in there.

 

MR. STERN: I disagree, Your Honor, because there

are a lot of powers that are set out specifically for the

conservator and the receiver in the statute, this one

doesn't make that. But I think more fundamentally there is,

like what the, I believe that the Third Amendment talks

about an acceleration of, like, the, of like of the

enterprises reducing or retaining mortgage portfolios, and

in that sense that's a kind of winding up. The, like, what

you have in terms just of their ongoing functionality is

not, like, in any sort of particular, sort of, like way,

it's winding up, what Treasury does think, you know, is that

given the difficulties that are involved in sort of like a

recapitalization of any conservatorship, and, you know,

we've said this many times that legislation is appropriate.

But --

 

JUDGE GINSBURG: But when the Third Amendment was

announced the Treasury said we're going to wind this thing

down, we're going to kill it, we're going to drive a stake

through its heart, and we're going to salt the earth so it

can never grow back.

 

MR. STERN: I don't remember that language.

 

JUDGE GINSBURG: Yes. You may be confusing it

with Tortego (phonetic sp.). But that was the gist of it,

we're not going to allow it to be recapitalized in any way,

and we're going to look to a future in which the GSEs don't

play a role.

 

MR. STERN: Well, I think what Treasury has said

repeatedly is that it thinks that congressional action is

appropriate, and we've discussed, like, the difficulties of

recapital --

 

JUDGE GINSBURG: But defending the congressional

action it has to live within the statute it's got.

 

MR. STERN: Yes, and it is. I mean, because the

alternatives are not good ones, I mean, it's not, like, what

they had wasn't a good alternative, I mean, that wasn't

doing well. What's happened now it's like they're all sort

of things to deal with a very difficult situation, and --

 

JUDGE GINSBURG: Well, I think they had two

alternatives to act as a conservator, which they didn't want

to do, or to act as a receiver, and move towards

liquidation.

 

MR. STERN: No, Your Honor, I don't think that

this is a move towards liquidation, there has not been a

liquidation, and again --

 

JUDGE GINSBURG: Well, they could move slowly

considering the size of the portfolio --

 

MR. STERN: Well, but --

 

JUDGE GINSBURG: -- they would have to move

slowly.

 

MR. STERN: -- and they could legitimately do

that, like, if that's what they wanted to do, they could do

that.

 

 

 

 

"there is another point where he agrees with olson that you can never get to safe and sound with nws, which is what conservator duty is."

 

that part confuses and troubles me the most. how can g believe that and also believe "one of the things one could turn up [from admin records] is an entirely lawful explanation [of the nws]... because liquidation at that scale was not practical, and that only by winding it down to a practical scale could they ever appoint themselves receiver" Olson made a grave mistake by replying "I suppose its possible".. instead of pointing out that you can only wind down to practical scale as a receiver not conservator

 

agreed.

 

there was discussion, however, of the whole notion of "winding down", which the treasury admits is the effect of the NWS, and which the statute refers to in the context of receivership.  i believe this was when treasury argued that the winding down power was that of both conservator and receiver, and ginsburg interjected that he thought the world respectively was implicit (ie winding down a receiver only function).  but if my recollection is correct, this exchange was at the behest of ginsburg questioning DOJ, not olson being effective

[doughishere]

Not important to the conversation....anyone have an idea as to what  "Tortego (phonetic sp.)." is referring to?

[Guest cherzeca]

@ doughy, re tortego, not a clue.  ginsburg is far too erudite for me to know.

 

@steve_berk yes, great example of ginsburg alluding to NWS as a slow liquidation/receiver action with DOJ, after alluding to NWS as a possible morphing as conservator with olson.  don't play poker with ginsburg

 

i am beginning to think that sweeney may want to wait until perry appeals decision is handed down before she rules on motion to compel...no reason to stick her neck out if there is either reversal or affirmance

 

 

[hardincap]

another interesting quote by g: "then comes the Third Amendment, and it's now concrete, we’re going to wind down these GSEs, but we're not going to pull the receivership trigger, which would, of course, have required, we're expecting the liquidation preferences of the Plaintiffs."

 

he reads "winding down" as receiver action, and yet considers nws to be "entirely lawful" in slow wind down scenario?

 

i think this may have been what prompted olson to switch to the "shell game" narrative in his closing

 

fwiw, carney thinks theres "decent chance" of remand for full admin record

[Eye4Valu]

To sum up the multiplicity of comments from the board's pro bono legal team, the legal team believes there is a decent probability that the case gets remanded so that a full administrative record can be produced. My question for the legal team is what then? What does the team anticipate will be produced as part of the administrative record? Would this allow any other discovery to go on in the Perry case? Let's assume the motion to compel in the federal claims court is decided upon following a remand in the Perry case and it is a favorable ruling, as many now suspect it may be considering the release of McFarland's depo testimony. How would that play into the Perry case if they were able to utilize information gleaned? Could that be utilized to supplement the administrative record? Or show it to be incomplete? The government doesn't exactly have the best reputation for being forth coming, or for producing all of the relevant record. 

 

 

[hardincap]

the main win would be denying the govt cover from the anti injunction clause, which was the govt's primary defense in the delaware case. this will let the delaware case proceed on substantive law

 

it could also embolden sweeney to rule in favor of the motion to compel, if she hasnt done so by then

[merkhet]

Ha! Pro Bono Legal Team. I like that.

 

@hardincap, one of the things you have to realize (for those who aren't legally trained) is that appellate judges are "trained" (so to speak) to press the edges of arguments. Judges have a lot of power, and, at the risk of being cliché, that power brings with it significant responsibility. Judges have to consider the Garrett Hardin question on ecolacy, "and then what?" You decide that some rule means this, and then what? What repercussions come forth as a result of your decision? So, they're going to press both sides on the legal bounds and consequences of the judges' potential decisions. You asked how Ginsburg can both believe that the NWS prevents things from getting to a "safe and sound" situation, and yet also believe that there could be a lawful explanation for the NWS -- the answer is that he is testing the outer bounds of what it would mean to either reverse or affirm. What makes me think Ginsburg is on our side is that you have to look for the moments of emotion -- and the "salting the Earth" part is the moment of emotion for me.

 

@Eye4Valu

 

My personal belief is that things will roll very quickly if we get even the remand for a full and complete administrative record. The thing is, they came into this knowing they were supposed to give us a full and complete administrative record. If that record could absolve them of the shareholders' allegations, why not provide them and be done with it? The answer is that, for some reason or another, they cannot provide it, and if they are mandated to turn it over, the game is done for them. That's when they will start to think of ways to make this disappear. Add that to the idea that if we get a remand, implicitly, (agree w/ @cherzeca) that means that 4617(f) is not a bar for ultra vires applications of administrative power, and the Delaware case gets to continue -- whether as part of a joint case or back in Delaware.

[Guest cherzeca]

To sum up the multiplicity of comments from the board's pro bono legal team, the legal team believes there is a decent probability that the case gets remanded so that a full administrative record can be produced. My question for the legal team is what then? What does the team anticipate will be produced as part of the administrative record? Would this allow any other discovery to go on in the Perry case? Let's assume the motion to compel in the federal claims court is decided upon following a remand in the Perry case and it is a favorable ruling, as many now suspect it may be considering the release of McFarland's depo testimony. How would that play into the Perry case if they were able to utilize information gleaned? Could that be utilized to supplement the administrative record? Or show it to be incomplete? The government doesn't exactly have the best reputation for being forth coming, or for producing all of the relevant record.

 

it depends.

 

the remand may come with substantial follow-on "advice" for lamberth, or it could not.  usually, when a court gets a motion to dismiss overturned, the case goes back to the trial judge to run it as he/she sees fit; it's his/her court.  the law will have been corrected, but how to set discovery, what kind of deposition schedule is done etc is up to trial judge to oversee.

 

in perry, the interesting point is that lamberth made a number of decisions on the law (facts were "irrelevant") some or many or all of which may be overturned.  how many questions of law that appeals court addresses will influence what manner of fact-finding will be required.

 

generally, i think that you can expect a "back to square one approach" where the motion to dismiss is denied

and trial court gets the parties to agree to a discovery schedule, and the motion to compel in fairholme becomes a very important ruling, because it is likely that many/all of the privileged documents would be germane to the perry case as well

 

EDIT:  just saw merkhet's response.  i agree that fhfa did not want to produce record at all, and

treasury produced a woefully incomplete record. question is will perry appeals court weigh in on whether fhfa must produce an administrative record (after all, fhfa is not a govt'al agency in its capacity as conservator, it has argued), and what the scope of treasury's record should be. 

 

usually, the record is no more nor less than what the agency considered at the time it made its administrative decision.  even with a remand, treasury and fhfa can be expected to shuck and jive nonetheless, with lamberth giving them perhaps a wee bit too much latitude, unless appeals court is very direct as to what remand demands in this instance

 

[Guest cherzeca]

the main win would be denying the govt cover from the anti injunction clause, which was the govt's primary defense in the delaware case. this will let the delaware case proceed on substantive law

 

it could also embolden sweeney to rule in favor of the motion to compel, if she hasnt done so by then

 

+1