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

[merkhet]

Unlike bankruptcy or receivership, the case law on corporate conservatorship is almost nonexistent. In some cases (insolvent credit unions for example), the term has been used interchangeably with receivership. The assumption that conservatorship means the company's value will be "returned" to shareholders, or that the conservator is required to act for the benefit of shareholders, does not appear to have solid precedent.

 

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.

 

Very interesting comments by Tim Howard today:

 

http://timhoward717.com/2014/10/02/honorable-maxine-waters-defends-the-rule-of-law-%D1%81%D1%83%D0%B4%D1%8C%D1%8F-%D0%BB%D0%B0%D0%BC%D0%B1%D0%B5%D1%80%D1%82-forever-stained/

 

I have resoundingly confirmed that судья Ламберт Soviet-style ruling has slammed the door on any notion that private capital will ever replace Fannie and Freddie.

 

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.

[merkhet]

The problems are not on the demand side but on the supply and origination sides - demand is weak because borrowers are already overleveraged and the job market remains thin, and origination is not functioning properly because the administration has put the banks in a position where a sold loan that goes bad - where you made a few hundred bps gain on sale - can create more than its face value in eventual losses. With lawsuits, the CFPB, the QM rules, etc. they have made originating any but the cleanest loans unappealing - even if the bank would love to own the loan once issued. Those restrictions have left the mortgage market still tight while all other forms of credit are back to the 2007 peak. It has little to do with how the GSEs continue to operate, in my view.

 

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.

 

I think mortgage market would function fine if we remain in the status quo, with Fannie/Freddie continuing to operate and effectively nationalized, and I think the market would adapt fine and probably quite eagerly to the Corker/Warner proposal. That said, any proposal involving private capital, while easy to fund now at the peak of the market, will be much more cyclical than the pure GSE model. Not clear to me if this is a big problem when you consider the availability of other cycle-dampening measures including a much more aggressive Fed.

 

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?

[TwoCitiesCapital]

Merkhet,

 

 

 

It seems to me that the burden on the remaining lawsuits is to show:

 

 

 

1)      FHFA was derelict in its duties as conservator (as evidenced by the implications and outcome of the sweep) to open it up to judicial review and

 

2)      That a taking (or securities purchase) has occurred by the Treasury

 

 

 

Lamberth says that there was no dereliction of duty because the FHFA was within its rights to execute the amendment. Lamberth sees the amendment as the solution that ended the ludicrous situation of borrowing from Treasury to repay the Treasury (and ultimately increasing the amount owed to the Treasury) AND resulted in increased profitability at the GSEs. Furthermore, Lamberth does make a strong case that defendants have failed to show that the FHFA lacked independence in its actions and that motives don’t matter.

 

 

 

Can you tell me your thoughts on why Lamberth is wrong here? Is it simply that Lamberth is misunderstanding the purpose of Conservatorship and how to measure the success of such?

 

 

 

Lamberth also suggests that no taking has occurred yet because the sweep is justified and that no purchase was made because no securities were granted – the sweep was simply an amendment to a right that the Treasury and FHFA were within their duties to amend.

 

 

 

Can you tell me why you disagree here? I’m having trouble understanding why the judge would adopt the most literal definition of “purchase.” I’m also having trouble understanding why you guys think that “ripeness” will occur. If the sweep is appropriate, and if the liquidation is successfully done via the sweep, then it’s hard for me to see when we’d ever hit the point of “ripeness” where a taking has occurred. Can you help understand why you think that a liquidation would result in “ripeness?”

 

Also, you seem really knowledgeable about this. Do you have a background in law?

[merkhet]

Zach, here's my thoughts on the opinion, as promised.

 

Section 3(A)(1) Section 4617(f) Bars Claims of Arbitrary and Capricious Conduct, under APA § 706(2)(A), Which Seek Declaratory, Injunctive, or Other Equitable Relief

 

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.

 

Section 3(A)(3) Treasury’s Execution of the Third Amendment Does Not Constitute the Purchase of New Securities in Contravention of HERA

 

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.)

 

Section 4(A) FHFA motives for entering the 3rd Amendment are irrelevant - FHFAs protection from judicial review means courts can only consider what the 3rd Amendment accomplishes and not the motives for entering it.

 

This is only true if arbitrary and capricious is off the table, which I don't think that it is.

 

Section 3(A)4(B) FHFA Has Not Violated 12 U.S.C. § 4617(a)(7)

 

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.

 

Section 3(A)4© FHFA Has Not Placed the GSEs in De Facto Liquidation

 

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!

 

Section 3B. HERA Bars the Plaintiffs’ Derivative Claims against FHFA and Treasury

 

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:

 

According to defendant, plaintiffs have failed to set forth a Fifth Amendment takings claim because the FHFA is not the United States and plaintiffs lacked a reasonable investment-backed expectation. With respect to the second argument, defendant contends that plaintiffs concede that Fannie and Freddie were insolvent; therefore the companies had no reasonable expectation of future profitability—a fact that plaintiffs deny and that plaintiffs argue can and will be proven with discovery.

 

Specifically, plaintiffs have shown that document and deposition discovery will disclose evidence relevant to the disputed factual issues about Fannie and Freddie’s solvency and the reasonableness of expectations about their future profitability, as well as provide answers related to why the government allowed the preexisting capital structure and stockholders to remain in place, and whether this decision was based on the partial expectation that Fannie and Freddie would be profitable again in the future.

[merkhet]

Also, you seem really knowledgeable about this. Do you have a background in law?

 

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.

[TwoCitiesCapital]

Thanks so much for your input and your patience. I've got no experience in law but am trying to make sure I'm not being stupid here. I dont think it takes a lawyer to see there's a smoking gun, just takes a lawyer to know if it can be proved.

 

[Mephistopheles]

Wow, that's some amazing analysis, Merkhet. I have no legal background, but when I read Judge Lamberth's opinion, a lot of what he said simply didn't make sense to me, one of them being the no liquidation argument as you pointed out.

 

He also countered the Plaintiff's claims that FHFA is depriving the FNMA/FMCC of capital by saying something to the effect of "well the 10% dividend also deprived them of capital":

 

"The individual plaintiffs specifically argue that the net worth sweep exceeds FHFA’s authority as a conservator

because it (1) depletes available capital; (2) “eliminates the possibility of normal business operations”; and (3)

carries an ultimate intent to wind down the GSEs. Individual Pls.’s Opp’n at 56-58. First, the original dividend

distribution scheme under the PSPAs also depleted the GSEs’ capital. Dividends distributed to security holders, by

nature, constitute a depletion of available capital. ..."

 

To me that argument is ridiculous.

____________________________________________

 

So the preferred are now closing in on at 10% of par value. Curious to know if anyone is adding to their position? I feel like the odds of shareholders winning in Federal Court of Claims are better than 1 in 10. Though I haven't added just yet.

[TwoCitiesCapital]

Wow, that's some amazing analysis, Merkhet. I have no legal background, but when I read Judge Lamberth's opinion, a lot of what he said simply didn't make sense to me, one of them being the no liquidation argument as you pointed out.

 

He also countered the Plaintiff's claims that FHFA is depriving the FNMA/FMCC of capital by saying something to the effect of "well the 10% dividend also deprived them of capital":

 

"The individual plaintiffs specifically argue that the net worth sweep exceeds FHFA’s authority as a conservator

because it (1) depletes available capital; (2) “eliminates the possibility of normal business operations”; and (3)

carries an ultimate intent to wind down the GSEs. Individual Pls.’s Opp’n at 56-58. First, the original dividend

distribution scheme under the PSPAs also depleted the GSEs’ capital. Dividends distributed to security holders, by

nature, constitute a depletion of available capital. ..."

 

To me that argument is ridiculous.

____________________________________________

 

So the preferred are now closing in on at 10% of par value. Curious to know if anyone is adding to their position? I feel like the odds of shareholders winning in Federal Court of Claims are better than 1 in 10. Though I haven't added just yet.

 

I doubled my position yesterday in common and preferreds. Everything I own is taking a beating though and I need to keep these at a reasonable allocation in the event I'm wrong (maximum of a 5-7% allocation I think). I will probably add again in the future, but it wont be until the next calendar year.

[merkhet]

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.

 

The individual plaintiffs specifically argue that the net worth sweep exceeds FHFA’s authority as a conservator because it (1) depletes available capital; (2) “eliminates the possibility of normal business operations”; and (3) carries an ultimate intent to wind down the GSEs. Individual Pls.’s Opp’n at 56-58. First, the original dividend distribution scheme under the PSPAs also depleted the GSEs’ capital. Dividends distributed to security holders, by nature, constitute a depletion of available capital. Second, there is no HERA provision that requires a conservator to abide by every public statement it has made. To the contrary, HERA permits a conservator wide latitude to flexibly operate the GSEs over time. See 12 U.S.C. § 4617(b)(2) Third, even if FHFA has explicitly stated an intent to eventually wind down the GSEs, such an intent is not automatically inconsistent with acting as a conservator. There surely can be a fluid progression from conservatorship to receivership without violating HERA, and that progression could very well involve a conservator that acknowledges an ultimate goal of liquidation. FHFA can lawfully take steps to maintain operational soundness and solvency, conserving the assets of the GSEs, until it decides that the time is right for liquidation.

 

So he references Section 4617(b)(2)...

 

(2) General powers

(A) Successor to regulated entity

The Agency shall, as conservator or receiver, and by operation of law, immediately succeed to—

(i) all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer, or director of such regulated entity with respect to the regulated entity and the assets of the regulated entity; and

(ii) title to the books, records, and assets of any other legal custodian of such regulated entity.

 

...as an indication of the broad power of Conservatorship, but ignores Section 4617(d), which is literally two paragraphs down.

 

(D) Powers as conservator

The Agency may, as conservator, take such action as may be—

(i) necessary to put the regulated entity in a sound and solvent condition; and

(ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.

[morningstar]

.......

 

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?

 

I don't see where there are excess funds pooling ... the Amendment would seem to prevent exactly this from happening, as all excess funding (i.e. generated capital in excess of the amount provided by the senior preferred) is paid out as a dividend. If the company enters a liquidation phase, the government preferred should roughly be made whole and the other equity instruments would recover nothing.

 

I also dispute the idea that private capital would be wary of what happened with Freddie/Fannie and view the government as a bad actor or suspect partner. The GSEs weren't in temporary trouble, they were kaput, and I think the broad global investor based acknowledges this. It's great for Fairholme/Perry if they can make a buck here but if/as they lose in court, I don't think much of the global investors base will view this as an abridgement of capitalism or a shift in the rules. For instance, what happened to bond investors in GM and Chrysler was much more severe, unfair, and coercive, and people seem plenty willing to invest in auto companies.

[merkhet]

I don't see where there are excess funds pooling ... the Amendment would seem to prevent exactly this from happening, as all excess funding (i.e. generated capital in excess of the amount provided by the senior preferred) is paid out as a dividend. If the company enters a liquidation phase, the government preferred should roughly be made whole and the other equity instruments would recover nothing.

 

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 also dispute the idea that private capital would be wary of what happened with Freddie/Fannie and view the government as a bad actor or suspect partner. The GSEs weren't in temporary trouble, they were kaput, and I think the broad global investor based acknowledges this. It's great for Fairholme/Perry if they can make a buck here but if/as they lose in court, I don't think much of the global investors base will view this as an abridgement of capitalism or a shift in the rules. For instance, what happened to bond investors in GM and Chrysler was much more severe, unfair, and coercive, and people seem plenty willing to invest in auto companies.

 

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.

[Grenville]

Great discussion. Thumbs up to all of you who are reading the opinion and the filings. It will be interesting to see how this plays out.

 

I just finished reading the Perry opinion, still need to process it all. I thought the Perry arguments were better when I first read the various complaints. It does seem like the judge involved is just as important as the legal arguments/lawyers in terms of the outcome of a specific case.

[morningstar]

@merkhet

 

I think your view is very dependent on a belief that by the time the Third Amendment rolled around, the agencies were seen as long-term profitable and a piggy bank that could be tapped. And that Treasury was basically operating with this agenda, and that FHFA was complicit (or simply lacked any effective independence).

 

If discovery turns up documents indicating that was the case, Fairholme and Perry have a real shot with this investment but I'm skeptical that will happen.

 

It's not as if people were clamouring down the door to make investments in Fannie/Freddie at that time and the government used its control of the company to shut them out. We'd be having a different conversation if in 2012 Berkowitz had gone to the FHFA and said, hey I have $200bn handy and can provide better terms than the Treasury just gave you - lets do a deal. But in practice, the FHFA was managing 2 entities that had one critical funding partner, looked quite likely to need lots of capital from that partner in the future considering the shakiness of the economic recovery (which capital the market might not provide on any terms, the lesson of 2008), and whose businesses were basically 100% dependent on the credit ratings the garnered from that relationship. In that view the Third Amendment could be a pretty reasonable measure to support the long-term solvency of the entities and their continued operation.

 

Again, I'm skeptical you can show in court this wasn't a perfectly reasonable deal for FHFA to take on behalf of the agencies - but the long shot makes more sense as an 8x bagger than when it was trading above 50% of par.

[merkhet]

Perhaps -- take a look at this graphic I pulled together outlining quarterly net income and shareholder equity prior to and after the Third Amendment. Even focusing on the first three quarters (and they likely knew how 3Q was shaping up by 8/2012) you can pretty clearly see that things were turning a corner. I don't think they really needed the funding commitment anymore, but I suppose reasonable minds can disagree on that.

 

Irrespective of the above, what purpose does it serve to keep Fannie & Freddie around in conservatorship?

 

And the question for me isn't whether it's a perfectly reasonable deal for FHFA to take -- the question for me boils down to the following: FHFA was tasked with putting F&F into a solvent position. Given that this was their statutory authority, does it exceed their authority to put in an Amendment that prevents capital build-up?

 

My guess is yes -- but Lamberth's guess was no, and for now, that's what matters.

[bmichaud]

My simple mind keeps going back to, WTF did they keep the junior prefs and common trading back in 2008? I could picture a Scalia asking something obvious like that - if you wanted to shut them down, why not cancel the securities and put them into Conservatorship/Pending receivership?

 

And - I just saw posted somewhere regarding Treasury's emergency authority...in protecting the tax payer, Treasury must consider the:

 

"The need to maintain the corporation’s status as a private shareholder-owned company."

 

Riddle me that.

 

[TwoCitiesCapital]

How are you guys thinking about the restructuring IF we win the cases.

 

It's a hard road for the common shareholders even if we win as the only way current common is worth anything is if the company is mostly recapped through retained earnings. Fairholme's plan and Blackstone's presentation both seem to support wiping out common or massive dilutio on top of the 80% taken by gov.  Is there a scenario where gov't warrants are worth something (exercised to purchase new common securities) and the common left worthless?

 

 

[merkhet]

My simple mind keeps going back to, WTF did they keep the junior prefs and common trading back in 2008? I could picture a Scalia asking something obvious like that - if you wanted to shut them down, why not cancel the securities and put them into Conservatorship/Pending receivership?

 

And - I just saw posted somewhere regarding Treasury's emergency authority...in protecting the tax payer, Treasury must consider the:

 

"The need to maintain the corporation’s status as a private shareholder-owned company."

 

Riddle me that.

 

That's part of the actual legislation here -- http://www.law.cornell.edu/uscode/text/12/1455

 

12 USC 1455 (l)(1)©

 

How are you guys thinking about the restructuring IF we win the cases.

 

It's a hard road for the common shareholders even if we win as the only way current common is worth anything is if the company is mostly recapped through retained earnings. Fairholme's plan and Blackstone's presentation both seem to support wiping out common or massive dilutio on top of the 80% taken by gov.  Is there a scenario where gov't warrants are worth something (exercised to purchase new common securities) and the common left worthless?

 

My sense is that the preferred is much safer than the common.

 

The Berkowitz solution actually left the run-off for the common stock & Treasury's warrants. I think Blackstone's presentation would leave very little for the common shareholders. There'd basically be about $60 billion for the private preferred and common stock, and you'd probably hand $33 billion over to the preferred shareholders.

[stevevri]

More from Epstein:

http://www.forbes.com/sites/richardepstein/2014/10/02/godzilla-versus-the-thing-the-wall-street-journals-improbable-defense-of-judge-lamberths-indefensible-decision-in-perry-capital/

[onyx1]

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."

 

I'm left wondering if he has left the door open, or as least provided a strong hint, to plaintiffs to challenge HERA, in its entirety, on constitutional grounds. 

[merkhet]

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."

 

I'm left wondering if he has left the door open, or as least provided a strong hint, to plaintiffs to challenge HERA, in its entirety, on constitutional grounds. 

 

Berkowitz apparently thinks so.

 

I've attached a letter from Berkowitz, and the notice that Perry will be appealing.

 

http://online.wsj.com/articles/hedge-fund-firm-perry-capital-files-appeal-of-fannie-freddie-decision-1412284219?tesla=y&mg=reno64-wsj

 

"The district court's decision overlooks important points of law and improperly resolved key questions of fact based on the government's cherry-picked record. The merits of this case deserve to be heard in court. Today's filing brings us closer to that objective," said Theodore B. Olson, the attorney representing Perry, in a statement.

2014-10-02_Perry_Notice_of_Appeal.pdf

2014-10-01_Fairholme_Letter_to_Shareholders.pdf

[constructive]

In other words, but for the Sweep, the companies would have built a combined amount of capital equal to about $188 billion

 

That might be a good legal argument but it is financially naive. But for emergency financing, the companies would have entered bankruptcy in 2008, potentially Chapter 7 as they would have rapidly run out liquidity to even keep the lights on.

[merkhet]

In other words, but for the Sweep, the companies would have built a combined amount of capital equal to about $188 billion

 

That might be a good legal argument but it is financially naive. But for emergency financing, the companies would have entered bankruptcy in 2008, potentially Chapter 7 as they would have rapidly run out liquidity to even keep the lights on.

 

You keep talking about 2008, and I can't understand it. If you're a doctor, and you save a person's life, are you then entitled to murder them later?

 

We are talking about what happened in 2012. No one needed emergency funding in 2012.

[constructive]

In other words, but for the Sweep, the companies would have built a combined amount of capital equal to about $188 billion

 

That might be a good legal argument but it is financially naive. But for emergency financing, the companies would have entered bankruptcy in 2008, potentially Chapter 7 as they would have rapidly run out liquidity to even keep the lights on.

 

You keep talking about 2008, and I can't understand it. If you're a doctor, and you save a person's life, are you then entitled to murder them later?

 

We are talking about what happened in 2012. No one needed emergency funding in 2012.

 

If the value of shares was $0 in 2008-2011, why should it not be $0 in 2012 and beyond?

 

There can be no taking of something that is worthless.

 

I don't believe the shareholders were even impaired by the full sweep, since they were already fully impaired by the insolvency and emergency financing of the company. The ultimate return for the government with the sweep will likely end up below 10% annualized.

[merkhet]

If the value of shares was $0 in 2008-2011, why should it not be $0 in 2012 and beyond?

 

Can you expand on that a little bit? There are many ways to go with what you're saying, and I just want to make sure that I'm understanding your point.

 

Why was the value of the shares $0? Because there were losses at one point in time? Because there was negative equity at one point in time?

 

Just trying to figure out what you're saying.

[Guest wellmont]

it's only worthless in 2012 because of the sweep. if there was no sweep these would be thriving right now. and there would be equity and net worth solvency and prosperity for holders. if us gov had "swept" aig and bac profits those securities would be worthless. you can argue that us gov saved fannie and freddie. this is true. but they could have just let them die and canceled the shares. but once they save the companies they should have let things play out as they did for every other bank and broker they saved. they let the shares keep trading. the sweep is a confiscation that they did not do to any other institution they "saved".