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

[Midas79]

Treasury and FHFA filed their motion to dismiss yesterday.

 

http://www.glenbradford.com/wp-content/uploads/2018/10/13-465-0421.pdf

 

Has anyone read through it yet? I did and I hope the Ps tear this thing to shreds. My thoughts:

 

• Argument VI ("Plaintiffs That Did Not Own Shares At  The Time Of The Alleged Taking,  Illegal Exaction, or Breach Lack Standing To Pursue Their Claims ") is reiterated on page 2. Does the idea that every NWS dividend is its own taking have any traction?
  
• Page 2: "Under the stock purchase agreements’ fixed 10 percent dividend obligation, these cash infusions require d combined dividend payments of nearly $19 billion per year from the Enterprises to Treasur y—more money than the Enterprises had made in all but one year of their existe nce."
  Um, no. The companies had the option to pay in kind, which Ds continue to completely ignore.
  
• Page 3: "First, plaintiffs’ claims are not  against the United States; FHFA as conservator stands in the Enterprises’ privat e shoes and plaintiffs cannot show  that FHFA as conservator is an “agent and arm of Treasury” such that it should be treated as the United States for Tucker Act purposes. This point is dispositive."
  Doesn't Judge McConnell's opinion in Rhode Island at the very least cast doubt on this? Heading B on page 7 (https://ecf.rid.uscourts.gov/cgi-bin/show_public_doc?2017cv0005-39) reads:
  "The Plaintiffs can prove that Fannie Mae and Freddie Mac are government actors for purposes of constitutional claims."
  D's point is not dispositive at all. If McConnell can rule that not only is FHFA a government actor but that Fannie and Freddie themselves are government actors for the purposes of constitutional claims, so can Sweeney and D's point is defeated.
  
• The Ds like to say that every court before has ruled in such and such a way. Is Sweeney really going to care about that?
  
• Page 8: "As a condition of such purchases, Congress directed Treasury to make a specific determination that the purchase terms would “protect the taxpayer” and, to that end, specifically authorized “limitations on the payment of dividends[.]” 
  Convenient that they leave out HERA's mandate that Treasury take into account
  ‘(iii) The corporation’s plan for the orderly resumption of private market funding or capital market access.
  ‘(v) The need to maintain the corporation’s status as a private shareholder-owned company.
  when making the conservatorship essentially permanent when signing the NWS.
  
• Page 12: "anticipated future draws would be necessary to pay those dividends.  See Fannie Mae 10-Q at 12-13 (Aug. 8, 2012); Freddi e Mac 10-Q at 10 (Aug. 7, 2012). "
  Don't forget here that FnF were controlled by FHFA at this point, who is a defendant in this case. As such, the companies' assertions (notwithstanding that they aren't even true, they were never required to pay dividends in cash so the "death spiral" narrative is false) are not independent here.
  
• Page 23: "Accordingly, because this Court lacks juri sdiction to entertain claims against the Enterprises, which are admittedly not the United St ates, the Court lacks jurisdiction to entertain claims against FHFA acting as their conservator. "
  See the McConnell ruling above. Not that it's binding on Sweeney, but that it provides an avenue to deny this point.
  
• Page 28: "Unless a stockholder can establish that “t he duty breached was owed to the stockholder” and the stockholder “can  prevail without showing an injury to the corporation,” the stockholde r’s claim is derivative"
  Good for us that Lamberth just said that the implied covenant of good faith and fair dealing claim cannot be dismissed! That's a direct claim because the covenant is between the stockholders and the companies, who acted at FHFA's direction. It's also good that granting relief to plaintiffs, be it money damages and/or recharacterizing excess NWS payments as redeeming the seniors, won't injure the corporations.
  
• Page 41: "In this case, the Court lacks ju risdiction to hear plaintiffs’ contract claims because Fannie Mae and Freddie Mac shareholders (1) have no cont ractual privity with the United States, and (2) cannot demonstrate that they were  intended beneficiaries of any c ontract with the United States. "
  Again, McConnell. And the succession clause bites both ways! If FHFA steps into the companies' shoes, and it is deemed to be a government actor, then shareholders' contracts really do have the government as a counterparty.
  
• Page 56: "The Court explained that the “‘only duty a contract imposes is to perform or pay damages,’” so even if the Government impe des performance, no taking occurs unless the Government also “substantially takes away the right to damages in the event of a breach.” "
  Isn't "taking away the right to damages in the event of a breach" exactly what the government is trying to do by getting this case dismissed? That would be pretty meta: dismissing the case causes a taking to occur?
  
• Page 61: "Even if the 10 percent dividend remained in pla ce, plaintiffs allege no scenario  in which the Enterprises would rebuild sufficient capital to pay down Treasur y’s $187.5 billion liquidation preference at the termination of the commitment and leave any mo ney remaining to distribute to the private shareholders. "
  Um, except for exactly what is happening at present?? If the NWS had never happened the seniors would be paid off and the companies would have around $14B between them, which could be distributed to private shareholders. This line of attack completely ignores reality and I hope Ps hammer on it. In fact, Treasury knew that the companies would eventually be able to "escape", which was the whole point of the NWS in the first place!!
  
• Page 62: "The Penn Central  inquiry looks at three f actors to determine whether a plaintiff has a regulatory takings claim:  (1) the regulation’s economic im pact; (2) the extent to which the regulation interferes with investment-back ed expectations; a nd (3) the nature or character of the governmental action.  Penn Central , 438 U.S. at 124.  Here, because the complaints fail to allege that the Third Amendment satisfies any of the Penn Central  factors, the Court should dismiss plaintiffs’ takings claims. "
  The second is certainly satisfied with respect to investment-backed expectations. Lamberth just addressed this. But I don't know if all three have to be satisfied or just one.
  
• Page 63: " Moreover, plaintiffs fail to allege how th eir liquidation preference could have been more valuable before the Third Amendment than it wa s after.  Although plaintiffs recognize that Treasury’s senior liqui dation preference was worth nearly  $200 billion before the Third Amendment, see Fairholme  ¶ 117, plaintiffs do not allege a but-for scenario in which the Enterprises would have had a surplus to distri bute to private sharehol ders after payment of Treasury’s senior li quidation preference."
  All Ps have to do is point to reality. P's liquidation preference is basically zero because it stands behind almost $200B of seniors. If the NWS had never happened the seniors would be paid off and the juniors' $33B in liquidation preference would be much more meaningful because it would be at the front of the line for equity.
  
• Page 66: "And plaintiffs’ purported expectation that FHFA would independently terminate the conservatorships at the first signs of recovery, see Fairholme ¶  102, Cacciapalle ¶  55, is unreasonable when HERA establishes no fixed expira tion date or mandatory termination criteria. "
  I am very glad that Lamberth addressed exactly this. Did the Ds not read his opinion? Lockhart's own words helped form that expectation. Ps can hardly be blamed for relying on them.
  
• Page 73: "Moreover, plaintiffs’ assertion that the “overr iding” purpose of the conservatorship is to resurrect the Enterprises to their pre-conserva torship condition conflicts  with HERA’s plain language, which specifies that  FHFA may appoint a conservator “for the purpose of reorganizing, rehabilitating, or  winding up the affairs” of the Enterprises."
  That last part is clearly misreading the statute. A conservator cannot wind up affairs of the company, that's a receiver's task. Sloppy wording in HERA, but the meaning is clear. Even then, the NWS doesn't attempt to wind up the companies.
  
• Page 74: "HERA makes no mention that Treasury should consider the interests of shareholders in its determination."
  But it does say that when Treasury must consider
  (vi) Restrictions on the use of corporation resources, including limitations on the payment of dividends and executive compensation and any such other terms and conditions as appropriate for those purposes.
  when purchasing securities. The NWS only puts restrictions on dividend payments up to the companies' entire net worth. That defeats the spirit of (vi) utterly, which is designed to help the companies preserve their capital.
  
• Page 78: " Thus, the complaints fail to show any intent to contract by either the Government or  the boards because (1) the Government did not need to bargain for the Enterprises’ consent, a nd (2) according to the complaints, the Enterprise boards provided consent to avoi d litigation and potent ial liability—not as a ma tter of contract.  "
  Point 1 is wrong. None of the other conditions in HERA for imposing conservatorship applied, so yes the government actually did need to bargain for consent, and they bargained in bad faith because their threat (to impose involuntary conservatorship) was actually empty.
  

 

What are the next dates for this case? Ps and Ds each get one more brief, and I thought I remembered the last brief being due in January but I can't find where that date is.

[rros]

Does this not tell us that Treasury was calling the shots all along ? Sorry, may be you all  know this already?

 

https://www.treasury.gov/press-center/press-releases/Pages/hp1079.aspx

 

https://www.treasury.gov/press-center/press-releases/Pages/hp1078.aspx

 

https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/PaulsonLtrPSPA_N508.pdf

Emily, this might help.

 

There is State terrorism. That is when countries like Iran promote/sponsor terror. There is State capitalism. Like when China reformulates the american system in a more totalitarian way. And there's the Regulatory State, our way of life. Which doesn't differ from the other two too much. It allows the US government to do whatever it pleases whenever and for whatever reason. As long there are a few conflicting regulations that appear to supersede the Law and that courts can't overcome.

 

It used to be that 'if the President does it, it is legal'. Add Watt to that.

[beaufort]

@cherzeca, lawyers familiar with rules of civil procedure in Lamberth's jurisdiction

 

Can Fairholme et al proceed for summary trial on affidavit?  Presumably if summary trial fails, plaintiffs can still go on to a jury trial on the merits.

How long to get into court in Lamberth's jurisdiction for a long jury trial?  By the time lawyers are coordinating calendars my guess is at least 3 years.   

 

[Guest cherzeca]

@cherzeca, lawyers familiar with rules of civil procedure in Lamberth's jurisdiction

 

Can Fairholme et al proceed for summary trial on affidavit?  Presumably if summary trial fails, plaintiffs can still go on to a jury trial on the merits.

How long to get into court in Lamberth's jurisdiction for a long jury trial?  By the time lawyers are coordinating calendars my guess is at least 3 years. 

 

no summary judgement.  lamberth decided the legal issue which is that Ps have opportunity to show that Ds breached fair dealing covenant.  all thats left is to marshall the facts at trial.  fair dealing is a highly fact dependent inquiry, but all of the fairholme discovery plus Ps discovery in this case relating to treasury's acts re NWS will be relevant.  this is likely not a trial treasury is eager to have.

 

both parties have something to appeal but I don't think either party has a right to an interlocutory appeal.  so lamberth could schedule a trial once he disposes of the likely motions to appeal.  or he could be somewhat more reluctant to march forward to trial for whatever reason

 

[beaufort]

I hear you on summary trial. Specifically as credibility is at issue. 

[Guest cherzeca]

I hear you on summary trial. Specifically as credibility is at issue.

 

the important thing to remember is that at trial lamberth only decides questions of admissibility of evidence.  the ultimate decision, whether NWS violates implied duty of fair dealing, is up to a layman jury who based upon their human experience will apply the fair dealing standard to the facts (whatever jury instructions Lambert gives on the legal standard of fair dealing will be general and broad.  it is up to jury to apply that standard to the facts surrounding NWS)

[beaufort]

I am sure the jury charge will be the object of much fighting over wording (if Lamberth entertains those submissions).

 

I agree that a jury on this file is a nightmare for the defendants. 

 

How long do you think before getting into court for the trial?  A poster on SA, who says he is a lawyer, advises that entering the order will take 8-12 months and 6 months for a date after that.  That will give us some idea as to timing for settlement.  How long for expert reports, assertive and responsive, to be exchanged before trial? 

 

     

[Guest cherzeca]

I am sure the jury charge will be the object of much fighting over wording (if Lamberth entertains those submissions).

 

I agree that a jury on this file is a nightmare for the defendants. 

 

How long do you think before getting into court for the trial?  A poster on SA, who says he is a lawyer, advises that entering the order will take 8-12 months and 6 months for a date after that.  That will give us some idea as to timing for settlement.  How long for expert reports, assertive and responsive, to be exchanged before trial? 

 

   

 

who the f knows...

[Eye4Valu]

I am sure the jury charge will be the object of much fighting over wording (if Lamberth entertains those submissions).

 

I agree that a jury on this file is a nightmare for the defendants. 

 

How long do you think before getting into court for the trial?  A poster on SA, who says he is a lawyer, advises that entering the order will take 8-12 months and 6 months for a date after that.  That will give us some idea as to timing for settlement.  How long for expert reports, assertive and responsive, to be exchanged before trial? 

 

   

 

who the f knows...

 

+1

[SnarkyPuppy]

New post on Fannie and Freddie on one of my favorite investment blogs. 

 

http://basehitinvesting.com/fannie-mae-freddie-mac-investor-sentiment-and-the-housing-market/

 

Well written and seems to grasp some of the basic tenants of the thesis - but derails at the end by basically agreeing you can't replace f/f but that a carbon copy replacement is a risk.  Ignores details of how that would actually play out (capital, contingent legal liability, warrant incentives, has already failed multiple times in legislative branch). 

 

Also claims on twitter that it likely won't be resolved until 2028 because that is when the warrants expire. 

- ignores government is made up of elected individuals who will be replaced way before 2028 (he's wrong on incentives)

- you can buy the $25 prefs at $6.  That's 15% CAGR over 10 years taxed once.  Is that below his hurdle rate?

 

It's fine to shrug and say too difficult but these conclusive statements are annoying and lazy. 

 

Uncertainty != Risk

[Midas79]

You are basing 15%  on what you will pay today. What about those who paid $25? Those who paid $12? What about lost dividends and time value of money lost? What about all the money spent in lawsuits? What about opportunity cost in other investments? What about volatility that has nothing to do with their finances but politics?

 

What about them? Those things are meaningless. Sunk cost fallacy takes care of most of them.

[investorG]

https://www.bloomberg.com/news/articles/2018-10-08/fannie-mae-board-member-frater-selected-to-serve-as-interim-ceo

 

Hugh R. Frater is the chairman of VEREIT, one of the largest net lease companies in the nation, which owns and manages over 100 million square feet of real estate.

 

He is the former chairman and chief executive officer of Berkadia, a highly rated master and primary servicer, top-tier commercial real estate loan originator, and investment sales advisor. Previously, Mr. Frater was a founding partner and managing director of BlackRock, the world’s largest global investment manager, where he also served as co-head of institutional client services and business development, head of the Real Estate Group, and a member of the Management Committee.

 

Mr. Frater serves on the boards of directors of ABR, a Bermuda-based reinsurer, and Fannie Mae, the nation's largest housing finance company. He is a former member of the board of the Mortgage Bankers Association (MBa), where he served as chairman of the MBa Affordable Housing Task Force, vice chair of the MBa GSE Multifamily Task Force, and a member of the MBa Audit Committee and the Commercial Real Estate/Multifamily Finance Board of Governors (COMBOG).

 

Mr. Frater holds an MBA from Columbia Business School and a bachelor’s degree from Dartmouth College.

 

at this point, I assume all important decisions run through Mnuchin.  We are reliant on him (or someone above him) standing up for what's right among the many strategic choices he will likely make in the coming months and quarters.

[Guest cherzeca]

https://www.bloomberg.com/news/articles/2018-10-08/fannie-mae-board-member-frater-selected-to-serve-as-interim-ceo

 

Hugh R. Frater is the chairman of VEREIT, one of the largest net lease companies in the nation, which owns and manages over 100 million square feet of real estate.

 

He is the former chairman and chief executive officer of Berkadia, a highly rated master and primary servicer, top-tier commercial real estate loan originator, and investment sales advisor. Previously, Mr. Frater was a founding partner and managing director of BlackRock, the world’s largest global investment manager, where he also served as co-head of institutional client services and business development, head of the Real Estate Group, and a member of the Management Committee.

 

Mr. Frater serves on the boards of directors of ABR, a Bermuda-based reinsurer, and Fannie Mae, the nation's largest housing finance company. He is a former member of the board of the Mortgage Bankers Association (MBa), where he served as chairman of the MBa Affordable Housing Task Force, vice chair of the MBa GSE Multifamily Task Force, and a member of the MBa Audit Committee and the Commercial Real Estate/Multifamily Finance Board of Governors (COMBOG).

 

Mr. Frater holds an MBA from Columbia Business School and a bachelor’s degree from Dartmouth College.

 

at this point, I assume all important decisions run through Mnuchin.  We are reliant on him (or someone above him) standing up for what's right among the many strategic choices he will likely make in the coming months and quarters.

 

the new ceo had to be a director.  all other officers earn multiples of what the ceo makes per congressional edict.  had to find someone for which the ceo pay was a bump up

[Dazel]

 

Cherzeca,

 

I know you joke....but he is former CEO and chairman for Berkshire and Jefferies backed Berkcadia ...they (Berkshire and Jefferies)could recap most of the company in 24 hours...pretty sure his salary would not matter if they were his partners! This type of investment would be very good for Berkshire and all involved. Credibility to Mnuchin....just saying. Complete speculation.

 

Dazel

[Dazel]

 

 

Also a founding partner at BlackRock....but I like speculating more on Berkshire!LOL

[rros]

 

 

Also a founding partner at BlackRock....but I like speculating more on Berkshire!LOL

Interesting, thank you. I found this from 2013.

https://www.nytimes.com/2013/04/24/realestate/commercial/the-30-minute-interview-hugh-r-frater.html

 

... Warren Buffett is very curious about the company, but this is not a big investment for him.

Maybe Fannie Mae is.

[SnarkyPuppy]

 

Cherzeca,

 

I know you joke....but he is former CEO and chairman for Berkshire and Jefferies backed Berkcadia ...they (Berkshire and Jefferies)could recap most of the company in 24 hours...pretty sure his salary would not matter if they were his partners! This type of investment would be very good for Berkshire and all involved. Credibility to Mnuchin....just saying. Complete speculation.

 

Dazel

 

I joked a while back but it's actually a great use of the $100bn+ cash

[DocSnowball]

It is an interim appointment, take it for what you will.

 

I’m trying to correlate this development (and my investment thesis) with all the key stakeholders esp Treasury, FHFA being tight lipped about the future. It is possible that a more permanent solution means either a permanent CEO will be appointed by Treasury after current FHFA director’s term ends, or it is eventually unnecessary because of proposed restructuring into new companies.

 

Why would Mnuchin be concerned about administrative solutions moving markets if the move was positive? The concerns are likely that the proposed solution can affect debt markets negatively, pointing to Treasury favoring restructuring rather than recap and release. Whether they can do this in a bipartisan way remains to be seen. I also still think investors close to Mnuchin not selling, and Moelis’ team involvement in the conversation, along with Lamberth and Sweeney cases remain indications that preferreds are unlikely to go to zero.

[Dazel]

 

 

All joking aside...there is not a person the planet that knows more about Freddie Mac then Mr.Buffett. He bought at $4 and sold at the top $70. He knows the business better than anyone....given the opportunity I would bet very large on Mr. Buffett making a deal of his lifetime.

 

The funny and somewhat stupid speculation part is the government would do the right thing.

 

 

[rros]

 

 

All joking aside...there is not a person the planet that knows more about Freddie Mac then Mr.Buffett. He bought at $4 and sold at the top $70. He knows the business better than anyone....given the opportunity I would bet very large on Mr. Buffett making a deal of his lifetime.

 

The funny and somewhat stupid speculation part is the government would do the right thing.

When asked a few years ago he said he wasn't interested "in the present form". He hinted at government involvement. Not the sweep, but in general. Like companies subject to policy and Congress. Although he would probably love the toll road of a government guarantee and a monopoly, what type of structure will be needed? And what makes you think Mr. Buffett will not throw legacy shareholders under the bus?

[investorG]

 

 

All joking aside...there is not a person the planet that knows more about Freddie Mac then Mr.Buffett. He bought at $4 and sold at the top $70. He knows the business better than anyone....given the opportunity I would bet very large on Mr. Buffett making a deal of his lifetime.

 

The funny and somewhat stupid speculation part is the government would do the right thing.

 

 

the sequence would be difficult and more tilted towards the back end of the process - he'd likely need to know the final legislative solution before putting up the $.

[Guest cherzeca]

 

 

All joking aside...there is not a person the planet that knows more about Freddie Mac then Mr.Buffett. He bought at $4 and sold at the top $70. He knows the business better than anyone....given the opportunity I would bet very large on Mr. Buffett making a deal of his lifetime.

 

The funny and somewhat stupid speculation part is the government would do the right thing.

 

 

the sequence would be difficult and more tilted towards the back end of the process - he'd likely need to know the final legislative solution before putting up the $.

 

correct.  I could see as a last refi step treasury selling a bunch of its common stock (from warrants) to Buffett as a sidecar to a public sale...with Buffett's involvement being the imprimatur for there public to buy

[investorG]

does anyone know why the plaintiffs keep agreeing to delay requests in the government's legal responses in various cases? 

 

I understand why the plaintiffs' lawyers would say yes but the end customer should be less interested in extending time??

[Midas79]

does anyone know why the plaintiffs keep agreeing to delay requests in the government's legal responses in various cases? 

 

I understand why the plaintiffs' lawyers would say yes but the end customer should be less interested in extending time??

 

I'm thinking that the plaintiffs don't want a trial, they want a settlement. That involves delaying, and next Monday's conference could be very important. What could they possibly be conferring about?

 

If the Democrats take the House in November then that could give the plaintiffs more leverage, pointing out that legislative action is even less likely with a divided Congress (if for some reason the administration is delaying in hopes of Congress passing something).

[Luke 532]

I'm thinking that the plaintiffs don't want a trial, they want a settlement. That involves delaying, and next Monday's conference could be very important. What could they possibly be conferring about?

 

+1