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

twacowfca

By twacowfca
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merkhet Newbie

merkhet

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Rosner is on CNBC and Bloomberg all the time. I suspect that it'll get to them, though I'm considering dropping off a copy of this to the Cooper & Kirk law firm -- I live a 15 minute walk from them.

 

A couple of filings in the last few days. One in the Sweeney court and two in the Iowa Southern District.

 

The essential gist of the filings is that they're claiming issue preclusion. (i.e. certain issues have already been decided in another court, and it's judicially inefficient to continue to litigate the same decided issues) And the defendants want either a dismissal or a stay pending appeal.

 

A few problems that I can see:

 

(1) While Continental Western is a subsidiary of Berkeley Insurance, it is not the same party, and an argument can be made that Continental Western deserves its day in court

 

(2) There is the possibility of a miscarriage of justice given that the original claim was never actually litigated, which may fall in favor of the plaintiffs actually litigating things out

 

(3) On the Takings claim in both the Sweeney and Iowa courts, there should be no issue preclusion because if you read the opinion carefully, Lamberth says that he doesn't have jurisdiction over the Takings claims and then proceeds, idiotically, to decide things on the Takings claims anyway

 

For me, the main question in my head right now is -- why did the government wait for so long to file a brief on the issue preclusion case? The Lamberth opinion came down on September 30th, and they waited a damn long time (meanwhile producing documents in Sweeney's case) to file for a stay.

 

EDIT: Sent Mr. Cooper an e-mail instead so that he gets the direct link. If I don't hear back after a few days, I'll drop off a hard copy at the office.

2014-10-30_Defendants_Supplemental_Motion_to_Dismiss.pdf

2014-10-28_Defendants_Motion_to_Stay_Proceedings_Pending_Appeal.pdf

2014-10-30_Defendants_Response_to_Plaintiffs_Supplemental_Brief_in_Opposition_to_Motion_to_Dismiss.pdf

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onyx1 Newbie

onyx1

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(1) While Continental Western is a subsidiary of Berkeley Insurance, it is not the same party, and an argument can be made that Continental Western deserves its day in court

 

I don't know if it makes any difference, but it is worth noting that Berkeley and their subs have owned Jr preferred shares since the early 2000's.

merkhet Newbie

merkhet

Posted
Posted

(1) While Continental Western is a subsidiary of Berkeley Insurance, it is not the same party, and an argument can be made that Continental Western deserves its day in court

 

I don't know if it makes any difference, but it is worth noting that Berkeley and their subs have owned Jr preferred shares since the early 2000's.

 

The key issue is whether there is privity between Berkeley & Continental Western -- which there might be -- but I think it will turn on whether the eager motion to dismiss from Lamberth would really count as a chance to "fully litigate" the matter given that he heard no arguments whatsoever.

muscleman Collaborator

muscleman

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His case would probably very quickly be dismissed by the precedent set by Judge Lamberth in the District Court of DC.

 

I see. Why did he file the case in D.C. district court any way? It looks redundant from the beginning, doesn't it?

 

muscleman Collaborator

muscleman

Posted
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No, slightly different claims.

 

Thank you for your help. I build a 15% position on these preferreds. Maybe you can call me crazy, as I am a legal idiot.

My primary rational is that in order for recapitalization of these companies to work, they have to treat current shareholders fairly. Otherwise they will fail to attract private capital.

And yes, I am prepared to look like a fool, if this position blows up.  :)

merkhet Newbie

merkhet

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If Boies wins in his case, I suspect there will be ramifications for us as well. (Likely positive ones.)

 

Boies is probably the world's best trial lawyer. If you can find the time, search for the YouTube video of his deposition on Bill Gates. He just eviscerates Gates. (And Gates is hardly a mental midget.)

brker_guy Newbie

brker_guy

Posted
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merkhet, completely agree with you.

 

Boies is probably the world's best trial lawyer. If you can find the time, search for the YouTube video of his deposition on Bill Gates. He just eviscerates Gates. (And Gates is hardly a mental midget.)

 

I did see some of the Gates deposition before.  Boies has all of my respects; he is very, very good.

merkhet Newbie

merkhet

Posted
Posted

He's a lawyer, not Superman. :)

 

Honestly, I hope that once he's done with AIG, someone hires him for FNMA... Cooper & Olson are good, but I feel Boies is on another level.

Mephistopheles Community Regular

Mephistopheles

Posted
Posted

So I know these are non-cumulative preferreds. But if there was a takings, can preferred holders demand payment for missed dividends? It's not like the companies weren't profitable enough to pay dividends, it was that the government came in and took the money.

Eye4Valu Newbie

Eye4Valu

Posted
Posted

So I know these are non-cumulative preferreds. But if there was a takings, can preferred holders demand payment for missed dividends? It's not like the companies weren't profitable enough to pay dividends, it was that the government came in and took the money.

 

Don't think so because they are non-cumulative and holders lose all rights to dividend during conservatorship. If the GSEs are released from conservatorship, the dividend should be reinstated and the pref go near or above par. One of the arguments now being made is the Third Amendment Sweep is a de facto liquidation, and thus breach of contract with regard to the pref's dividend in the Court of Federal Claims. The Gov and Lamberth argue this isn't correct, that the cases aren't ripe, because a fourth amendment is possible, and liquidation thus hasn't occurred yet because they're still in conservatorship.

 

In my mind, even if they had been put into receivership instead of conservatorship, the pref holders would still be entitled to their contractual agreement, if FNMA and FMCC had the capital in liquidation to flow down to the prefs, which they appear to have. Anyway you cut it, the Gov's actions do not make sense in light of conservatorship or receivership due to the third amendment profit sweep.   

merkhet Newbie

merkhet

Posted
Posted

http://www.bloomberg.com/news/2014-11-06/fannie-freddie-ceos-tout-their-own-housing-finance-fixes.html

 

Looks like the CEOs are starting to speak up...

 

Changing the bailout terms is one area where lawmakers could help, Mayopoulos said.

 

“That’s something that Congress will ultimately need to address if this company’s going to continue to operate,” he said. “It’s very difficult without capital.”

 

During a conference call with reporters, Layton said any decisions about the company’s future are up to the Federal Housing Finance Agency and Congress. At the same time, he emphasized that Freddie Mac is improving its technology, creating deals that transfer credit risk from the company to private investors, and improving customer service.

 

“We are becoming a stronger and better company,” he said. “We are helping our customers more and more, and we are actively engaged in improving the nation’s system of housing finance.”

merkhet Newbie

merkhet

Posted
Posted

Sadly, that article seems to ignore two things:

 

(1) The FIA business could probably be sold as a run-off for close to $40 billion or more. (The run-off valuation based off Pershing Square's valuation is about $50 billion discounted @ 10%.)

 

(2) The g-fees can increase to about 100 bps to make after-tax earnings close to $25 billion a year or so.

 

So, even assuming the following:

 

2.5% cap ratio = $125 billion

5.0% cap ratio = $250 billion

 

You're looking at around 3 to 8 years to full capitalization.

 

Moreover, Treasury's warrants can easily have their strike prices increased so that by exercising the warrants, they could raise a significant amount of capital immediately.

 

(Also, note, Carney got his math wrong -- for some reason, even after paying off Treasury's government preferred, he still uses the $3.8 billion earnings number rather than the $14.3 billion earnings number. Not to malign my former profession, but math isn't the average lawyer's strong suit.)

Mephistopheles Community Regular

Mephistopheles

Posted
Posted

 

 

Moreover, Treasury's warrants can easily have their strike prices increased so that by exercising the warrants, they could raise a significant amount of capital immediately.

 

 

Why would the strike price increase?

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