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

[merkhet]

Throughout the transcript, the loan to AIG is referred to as a 13(3) loan. Could someone point me in the direction as to determining what the means and what it is? It seems that one of the plaintiffs arguments was that the government is authorized to accept equity on top of an interest rate in exchange for the loan and makes multiple references that this was only done required of AIG.

 

Ultimately, I'm trying to determine how the 79.9% equity stake granted to the government here differs from the 79.9% granted to the government in the case of Fannie/Freddie to know how relevant this ruling will be to us.

 

Thanks,

 

http://www.federalreserve.gov/aboutthefed/section13.htm

 

13(3) is a provision dealing with the powers of the Federal Reserve. The plaintiff is arguing that the government is not authorized to accept equity as anything other than collateral.

 

The benefit here wouldn't have anything to do with the Fannie warrants as the Treasury was free to accept warrants for their deal versus the Federal Reserve accepting warrants. The applicability of the AIG case to the Fannie & Freddie case is that there will be relevant precedent on what might constitute an illegal exaction in this type of case, whether what happened to AIG is a physical or regulatory taking and how economic loss will be viewed.

[doughishere]

Exclusive: Leaked Treasury Memo Counters Legal Claims by Shawn McCoy

April 29, 2015

 

http://www.insidesources.com/exclusive-leaked-treasury-memo-counters-legal-claims/

 

A leaked Treasury memo obtained by InsideSources may raise new questions about the government’s compliance in turning over documents to a U.S. District Court prior to a ruling made last fall in a case brought by shareholders of Fannie Mae and Freddie Mac.

 

In September, U.S. District Judge Royce Lamberth dismissed a suit against the US Treasury over its seizure of all profits from the two Government-Sponsored Enterprises (GSEs).  Lamberth’s decision is currently being appealed.

 

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But during that case, Treasury was required to turn over all relevant materials to the court for review. The memo obtained by InsideSources, dated January 4, 2011, was never disclosed to the court as part of the Administrative Record.

 

The memo was authored by Jeffrey Goldstein, the Undersecretary for Domestic Finance. While another memo by Goldstein from two weeks prior had been given to the court, the failure of Treasury to turn over a highly-relevant planning memo may raise doubts over whether Lamberth was given all of the relevant information prior to his decision.

 

Besides its exclusion from the Administrative Record in the first place, the memo could create legal issues for Treasury, as it seems to argue against following the federal statute (HERA) that governs the conservatorship.

 

Additionally, the memo raises other questions over Treasury’s favored reform—to “end the GSEs.” Efforts to wind down the GSEs are described as promoting a “bank-centric model” that “benefits larger institutions” and could exacerbate concerns over mortgage lenders being too big to fail. Borrowers at smaller institutions could expect higher costs. Treasury foresees reduced use of 30-year fixed rate mortgages, and the memo states, “markets would be subject to greater swings in spreads and liquidity and credit pricing would be more pro-cyclical.”

 

The memo also contrasts public statements made by Treasury that the GSEs would need 10 percent capital ratios.  Privately, it states that Treasury believes the number to be closer to between 3-4 percent.

 

The legal implications in the disclosure of this memo are unclear.  However, its exposure will probably raise questions about the existence of other undisclosed documents. Treasury simultaneously faces more than a dozen other lawsuits related to the profit sweep.

 

The Treasury did not immediately respond to a request for comment.

[merkhet]

That memo is the motherlode. Here's my quick analysis of this:

 

(1) I haven't checked the story as to whether this is a document that was left out of the Lamberth court, but if it was, then is a big no-no -- and that judgment will at the very least be vacated and remanded for a second look.

 

(2) Why is the Treasury department discussing what the "Transition Plan" will look like for the GSEs when FHFA is supposed to be the conservator? Treasury's only role should be to deal w/ their PSPA duties.

- You can see this in things like "End activities the GSEs should never have been doing in the first place," or "Setting the required capital for the GSEs to 300 to 400 bps," or "Potentially accelerate recognition of losses prior to 2012."

 

(3) Option 1 indicates that adequately capitalizing the GSEs and then having them exit conservatorship was the initial path laid out under HERA and the Paulson Treasury -- and confirms that this could be done without any legislation by Congress.

 

(4) Option 2 is completely untenable because of the "Key criticisms of this system"

- Moving from 30 year mortgages to 3 year and 5 year hybrids

- More pro-cyclical markets

- Increased mortgage rates beyond anticipated rates implied by higher capital standards

 

(5) Option 3 indicates that they'd convert Fannie & Freddie into First-Loss Providers once the FDIC-like portion was created -- very similar to the model that Jim Millstein suggested a while back -- I believe I posted it a few months ago.

 

I repeat. Motherlode.

[merkhet]

 

(5) Option 3 indicates that they'd convert Fannie & Freddie into First-Loss Providers once the FDIC-like portion was created -- very similar to the model that Jim Millstein suggested a while back -- I believe I posted it a few months ago.

 

 

Attached.

2014-11-05_Possible_Restructuring_Method.pdf

[merkhet]

One other thing to consider -- the timing of this leak seems interesting. If things are going according to the schedule laid out from the last status conference, discovery should have ended by now -- meaning the government should have turned over all relevant documents save for the clearly labeled privileged documents.

 

I wonder if they left this memo out of the discovery in the Court of Federal Claims. The next status conference is going to be mighty interesting.

[onyx1]

A bombshell indeed.  The government's entire case is starting to unravel from many sides.

 

In addition to the obvious lack of FHFA independence, and failure to disclose key documents (I bet there will be more), there is an additional angle:

 

One of the reasons the DOJ gave for declaring documents as "privileged" was that any disclosure of discussions about the fate of the GSE would create "chaos" in the world financial markets.  Now that this discussion paper has been released and, of course, no "chaos" has been observed, the entire privilege argument begins to fall away. 

[TwoCitiesCapital]

Throughout the transcript, the loan to AIG is referred to as a 13(3) loan. Could someone point me in the direction as to determining what the means and what it is? It seems that one of the plaintiffs arguments was that the government is authorized to accept equity on top of an interest rate in exchange for the loan and makes multiple references that this was only done required of AIG.

 

Ultimately, I'm trying to determine how the 79.9% equity stake granted to the government here differs from the 79.9% granted to the government in the case of Fannie/Freddie to know how relevant this ruling will be to us.

 

Thanks,

 

http://www.federalreserve.gov/aboutthefed/section13.htm

 

13(3) is a provision dealing with the powers of the Federal Reserve. The plaintiff is arguing that the government is not authorized to accept equity as anything other than collateral.

 

The benefit here wouldn't have anything to do with the Fannie warrants as the Treasury was free to accept warrants for their deal versus the Federal Reserve accepting warrants. The applicability of the AIG case to the Fannie & Freddie case is that there will be relevant precedent on what might constitute an illegal exaction in this type of case, whether what happened to AIG is a physical or regulatory taking and how economic loss will be viewed.

 

Thanks! I figured there was a difference, but wanted to know what it was and what implications a turnover of the 79.9% in the AIG case would mean for us.

[doughishere]

Its almost as if they feel that the original terms didn't punish shareholders enough and now they are justifying more. To which they even admit that some of the criticisms have been alleviated.

 

Key criticism of this system(which are partially mitigated through provisions in Dodd-Frank):

• Creates another set of private financial firrms that are too big to fail.
  
• Does not represent fundamental reform and does not "end GSEs." Replicates the pre-crisi system of "heads I win/tails you loose mentality of private shareholders.
  
• Inadequate taxpayer protections and abuse of the perception of government support.
  

 

 

"This is essentially the path laid out under HERA and the Paulson Treasury when the GSEs were put into conservatorship in September 2008"

[constructive]

(2) Why is the Treasury department discussing what the "Transition Plan" will look like for the GSEs when FHFA is supposed to be the conservator? Treasury's only role should be to deal w/ their PSPA duties.

- You can see this in things like "End activities the GSEs should never have been doing in the first place," or "Setting the required capital for the GSEs to 300 to 400 bps," or "Potentially accelerate recognition of losses prior to 2012."

 

Discussing potential policy is part of the Treasury department's job. They weren't interfering with the conservator's role or communicating these ideas to the GSEs.

[merkhet]

(2) Why is the Treasury department discussing what the "Transition Plan" will look like for the GSEs when FHFA is supposed to be the conservator? Treasury's only role should be to deal w/ their PSPA duties.

- You can see this in things like "End activities the GSEs should never have been doing in the first place," or "Setting the required capital for the GSEs to 300 to 400 bps," or "Potentially accelerate recognition of losses prior to 2012."

 

Discussing potential policy is part of the Treasury department's job. They weren't interfering with the conservator's role or communicating these ideas to the GSEs.

 

Jon Prior from Politico mentioned this as well -- that it could be an intellectual exercise, but that doesn't seem to be the case if you read the actual document. The memo is written as a policy memo to Geithner as to what to do.

 

http://www.insidesources.com/wp-content/uploads/2015/04/DOT-1.4.2011.pdf

 

For instance, on page 2, the exact wording on the memo is as follows:

 

"As part of the PSPAs, the GSEs have already begun to reduce the size of their retained portfolios by at least 10% per year. We would continue at this pace and look for additional opportunities to accelerate reductions, particularly through disposition of non-performing loans."

 

Who is the "we" that the Treasury is referencing there? If this is just discussing potential policy, then why are they using the term "we"?

 

Recall that this is a memo sent to Secretary Geithner.

 

"Consider managing certain assets of FNM and FRE jointly (REO, etc) to realize economies of scale and outsource any non-core activities."

 

The memo is directed at Geithner to ask him to consider how to manage various assets of FNM & FRE. It doesn't say FHFA should consider managing things... it's just "consider."

 

If they weren't interfering with the conservator's role or communicating these ideas to the GSEs, then why does the memo say the following:

 

The Administration will work with the FHFA and the Fed to establish improved capital requirements that reflect differential risk weightings...

 

That certainly sounds like someone is interfering and/or communicating things to FHFA and/or the GSEs, which they are not allowed to do based on HERA.

 

You'll also notice that, on page 3, the 4th item says to "Affirm our current obligations" with respect to the PSPAs. If the rest of the items aren't actually directives that the Treasury is supposed to act out, wouldn't the 4th item be distinguished in some way? Like "Treasury should affirm our obligations" to be distinguished from the other three items on which Treasury is merely pontificating?

 

In any case, IMHO, there is more than enough here for Cooper to show Sweeney that there's direction from Treasury to FHFA -- so that they can either lift the privilege on the documents that may show more of the same and/or prove jurisdiction in Sweeney's court.

[doughishere]

Leaked Fannie (FNMA), Freddie (FMCC) Memo May Include a 'Bombshell', Dick Bove Says

 

http://www.streetinsider.com/Analyst+Comments/Leaked+Fannie+(FNMA),+Freddie+(FMCC)+Memo+May+Include+a+Bombshell,+Dick+Bove+Says/10507208.html

 

 

 

Rafferty Capital analyst Dick Bove weighed in on the leaked memo related to Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC), highlighted earlier.

 

"I have read the Treasury memo in question and it raises serious questions as to whether the Treasury is following the law and even if Judge Lamberth understands the law," Bove said.

 

Bove highlights that one interesting point in the memo is that it suggests that F&F have capital ratios of 3% to 4%. This is substantially lower than current demands that they have capital ratios of 10%.

 

Bove said the "bombshell" in the report is the following: "Ensure $275 billion of funding capacity after 2012 is not used to pay dividends. This may require converting preferred stock into common or cutting or deferring payment of the dividend … ."

 

"This is directly contrary to the current practice whereby the Treasury is taking all of F&F’s profits as a dividend and driving the two companies into insolvency by doing so," Bove said.

 

Further, Bove highlights that the memo describes Option 1 as part of the “End State Options” for F&F. The memo states: ”After becoming adequately capitalized during the Transition, the GSEs would exit the conservatorship as private companies..."

 

"This is essentially the path laid out under HERA and the Paulson Treasury when the GSEs were put into conservatorship in September 2008," Bove said. "This quote is basically saying that this is the law."

 

Bove said while there is much more in the memo it is up to Senator Grassley to pursue these issues. He also said the memo "should also let jurists like Judge Lamberth think about the fact that material information is being withheld by the Treasury. More importantly, whether it is the jurists’ responsibility to uphold the law or not."

[doughishere]

are you guys cool with me posting these news articles?

[merkhet]

are you guys cool with me posting these news articles?

 

I think it's helpful.

[merkhet]

http://www.valuewalk.com/2015/04/fannie-mae-freddie-mac-dick-bove-calls-it-a-bombshell/

 

Dick Bove's comments on the leaked memo.

[doughishere]

Leaked Treasury memo on Fannie, Freddie fuels fire for sweep critics

Why wasn’t key document turned over in federal lawsuit?

 

http://www.housingwire.com/articles/33740-leaked-treasury-memo-on-fannie-freddie-fuels-fire-for-sweep-critics

[Menko]

are you guys cool with me posting these news articles?

 

I think it's helpful.

 

Yes please continue to do so!

I think this thread is outstanding thanks to Merkhet and others.

[doughishere]

Anyone know when the next meeting is between fairlome and the govt and the judge is....what they call it is slipping my mind right now.

[merkhet]

They release the info on whether there will be a status conference on Mondays.

 

Also, someone alerted me to the following over the weekend

 

“@valuewalk: New development - We have reason to believe more Treasury memos about $FNMA $FMCC will be comng out - unconfirmed - but stay tuned”

[doughishere]

Yup

 

http://m.imgur.com/LVSdoKH

[merkhet]

Anyone know when the next meeting is between fairlome and the govt and the judge is....what they call it is slipping my mind right now.

 

No status conference this week.

[doughishere]

Maybe the leaked document isnt as big of a deal as we thought..maybe fairlome knows about it already

 

[doughishere]

http://m.imgur.com/8XxUVHw

 

ValueWalk ‏@valuewalk  25m25 minutes ago

Ackman says no alternative to $FNMA and $FFMCC - the truth will prevail

[doughishere]

http://malonigse.blogspot.com/

 

Treasury Memo

 

Not being a lawyer –instinctive sensing how it might play in the dizzying remaining GSE court cases--and not believing in coincidences, I think somebody (former Treasury official?) gave Goldstein 2.0 to an obscure publication, hoping to stir things up—politically and legally—as the leaker sat back to see who among us bayed at the moon loudest and most effectively.

 

He/she must be disappointed. I didn’t sense any mountains moving in the Court of Claims (Judge Sweeney), in the Appeals Court (Judge Lamberth’s peers), on the Hill, or among the media. I could be wrong, but....

 

 

The expected comments/questions about Goldstein’s memo run the gamut.

 

---“It’s the smoking gun (for the plaintiffs).” (I don’t think so.)

 

---“It’s been out before and Lamberth and Sweeney have it.”

 

---“It was withheld from Lamberth and Sweeney, both will be pissed”

 

---”It makes clear FHFA wasn’t running the show, contrary to what the law (HERA) stipulates.” (Tru dat!)

 

---”Where’s the reference to the taxpayers money being ‘invested” not loaned to F&F.”

 

---“The memo claims the GSEs only need between 3 and 4% to capitalize their business.”

---”It shows the Obama Administration just followed the agenda that Paulson previously developed.” (That theme is David Fiderer’s favorite, as well as for several other sources.)

 

---”Looks like the big plan always was to do away with F&F, giving the primary and secondary markets to the TBTF banks.” (We may have a winner!)

 

---“Will Goldstein be deposed, if he hasn’t already?”

 

---“If the report was withheld, will Sen. Grassley go after the Treasury and DoJ for their shoddy antics?”

 

---“It says they should be reprivatized after getting recapitalized. But how can they get capital, if Treasury keeps taking….”

 

(Naturally and par for the course in DC, on Friday night, as this blog was being drafted, there were rumors of additional “heretofore secret memos”  circulating and soon to be revealed.)

 

 

 

Maloni’s Take

 

 

 

While I was delighted to see this document emerge, I sense the very smart lawyers at the big firms working this case know all about the memo and the issues contained.

 

My conclusions don’t change, the Hill doesn’t care enough to do anything and likely can’t for the reasons we’ve been identifying for weeks.

 

So far, the courts seem to think that hedge funds dwell in that  the part of our economy doesn’t merit benefit of the laws. And, at the end of the day, the delays are only screwing Fannie and Freddie, right?

 

Voters have no idea of what’s going on and how conservatorship will impact them.

 

 

If/when it happens, the public won’t understand until it’s too late.

 

The public will get upset when F&F are gone, which will be too late,  and suddenly consumers find themselves paying more for fewer mortgage options—including much more for fixed rate financing, if its obtainable--and not liking the control lenders wield over them and their choices.

 

Right now, it’s all about convincing those jurists still in the action—ultimately the SCOTUS--that the US government lied, bent and likely broke the HERA law, had little intention to preserve and restore Fannie Mae and Freddie Mac, made some really dumb financial and political moves--which they are having trouble hiding or disguising--and which they hope to slow walk long enough to let them get out of town and leave the mess in Hillary’s or Jeb’s lap (Oops, or Bernie’s?).

 

Maybe some new disclosures will turn up the heat on the White House and the courts and maybe even Congress, but I ain’t betting the grandkids' college funds on it.

[merkhet]

Timeline for the Perry appeal attached.

 

Given the timeline, I think it's possible that the appeal gets argued and decided by the end of the year.

2015-05-06_Per_Curiam_Order_for_Brief_Deadlines.pdf

[merkhet]

It seems like things are coming to a boil.

 

http://www.housingwire.com/articles/33838-senate-bank-chair-weighing-sweeping-gse-lending-overhaul?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=housingwire

 

The Senate regulatory relief package may also include a number of GSE proposals, analysts say.

 

“Given the inherently complicated nature of GSE reform, our sense is that if Senator Shelby’s package does include GSE measures it will likely focus on peripheral issues such as CEO compensation at the GSEs, efforts to expand the Common Securitization Platform’s reach, and Sen. Corker’s ‘Jumpstart GSE Reform’ amendment,” Compass Point says.

 

Of these proposals, analysts say, the “Jumpstart GSE Reform” amendment is the most notable as it would explicitly prohibit the U.S. Treasury Department from selling, transferring, relinquishing, divesting, or in any way disposing of its senior preferred stock holdings in the GSEs.

 

Passage of the Corker amendment would be viewed as a negative event for current GSE shareholders as it would foreclose on an administrative path for action and leave the issue squarely in the hands of Congress where it would surely languish until 2017 at the earliest.

 

As far as I can tell:

 

(1) Treasury says that it's up to Congress to deal with GSEs

(2) Congress says great, and we'll make sure we foreclose on any possible administrative reform in case you don't like what we do

 

We'll see soon whether Congress has essentially called Treasury's bluff or if Treasury and the Obama administration really want to punt this off to a Republican Congress.