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

[orthopa]

Looks like the perfect ruling for AIG and FNMA shareholders.

 

Greenberg wins, good for FNMA/FMCC as gov found wrong/acted illegally.

 

No damages so AIG not going to pay out. (It would'nt have anyway as AIG was not responsible for damages if govt acted illegally, ie loss as they did).

 

As a shareholder for both I am happy, bet Berkowitz is too.

[TwoCitiesCapital]

Looks like the perfect ruling for AIG and FNMA shareholders.

 

Greenberg wins, good for FNMA/FMCC as gov found wrong/acted illegally.

 

No damages so AIG not going to pay out. (It would'nt have anyway as AIG was not responsible for damages if govt acted illegally, ie loss as they did).

 

As a shareholder for both I am happy, bet Berkowitz is too.

 

Seems odd to me. The reason no damages were awarded because the judge says that Greenberg failed to show the harm to shareholders given that the alternative was an AIG bankruptcy with no government support; however, that wasn't the only alternative. The alternative was that AIG receive support under similar terms given to other massively troubled financial institutions at the time. I haven't read the full docs - just an article or two covering the decision so it could be the judge is giving credit to the gov't claims that no bailout would have happened without the equity kicker, but it seems like a strange line of reasoning assuming that bankruptcy was the only other alternative just because the government said so...

[Luke 532]

Is this the wrong way to interpret the AIG decision? (my thoughts below)...

 

Bottom-line: gov't acted illegally. As an FNMAS shareholder I don't care about 2008, I care about 2012... and the fact that 2008 may have been illegal makes the 2012 net worth sweep a more likely win.

[doughishere]

Agreed Luke

[merkhet]

Looks like the perfect ruling for AIG and FNMA shareholders.

 

Greenberg wins, good for FNMA/FMCC as gov found wrong/acted illegally.

 

No damages so AIG not going to pay out. (It would'nt have anyway as AIG was not responsible for damages if govt acted illegally, ie loss as they did).

 

As a shareholder for both I am happy, bet Berkowitz is too.

 

Seems odd to me. The reason no damages were awarded because the judge says that Greenberg failed to show the harm to shareholders given that the alternative was an AIG bankruptcy with no government support; however, that wasn't the only alternative. The alternative was that AIG receive support under similar terms given to other massively troubled financial institutions at the time. I haven't read the full docs - just an article or two covering the decision so it could be the judge is giving credit to the gov't claims that no bailout would have happened without the equity kicker, but it seems like a strange line of reasoning assuming that bankruptcy was the only other alternative just because the government said so...

 

The issue here isn't that the interest rate was too high -- the issue here is that the Federal Reserve did not have to authority to extract an equity payment based on its statutory authority under 13(3). Once it's established that the government did something wrong, which it did, then the question turned to "what was the harm?" In this case, the question was "but for the loan, what would shareholders have gotten?" And the answer was nothing -- and the interest rate was irrelevant to whether AIG would have gone bankrupt absent the loan.

 

Is this the wrong way to interpret the AIG decision? (my thoughts below)...

 

Bottom-line: gov't acted illegally. As an FNMAS shareholder I don't care about 2008, I care about 2012... and the fact that 2008 may have been illegal makes the 2012 net worth sweep a more likely win.

 

I heard someone mention that this could be construed as "The Fairholme Ruling" -- doesn't hurt AIG but helps FNMA. The bottom line is that the government acted illegally by exacting value from the shareholders. The reason they don't have to pay anything in AIG is that "but for" the loan, the AIG shareholders would have gotten nothing -- in the Fannie Mae situation, "but for" the 2012 Amendment, the FNMA shareholders would have been significantly better off financially.

[Luke 532]

Herzeca was great during the MBIA/BAC trial.  Here's an excerpt of his take on the AIG ruling in terms of what it means for Fannie:

 

http://mbibaclitigtion.blogspot.com/2015/06/judge-wheelers-opinion-in-starr-and-is.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MbiaVBankOfAmericaLitigationCommentary+%28MBIA+v.+Bank+of+America+Litigation+Commentary%29

"Read through to FNMA? Yes as to the psychological notion that when the US acted in connection with the financial crisis, no private party can complain....that you can't fight city hall.

 

You can fight city hall.

 

As to legal theory, FNMA is asserting no illegal exaction claim, so there is no precedential value. But in many ways, FNMA presents an easier case regarding damages than AIG, since it is clear that when the 3rd Amendment was entered into, FNMA was not only profitable but, with the prospect for the reversal of the deferred tax assets, or DTAs, that the US was well aware of, there was over $100B of equity value for the taking....which is what the US did."

[doughishere]

Nice luke. Good find. Hero member indeed.

[Luke 532]

Nice luke. Good find. Hero member indeed.

 

Thanks, but I'm afraid that's an arbitrary designation based solely on number of posts rather than quality of posts.

[orthopa]

Nice find Luke thanks. I may add to my FNMA holdings as I think it makes clear the sweep was illegal especially in light of the fact that FNMA was profitable at the time it occurred.

[twacowfca]

Looks like the perfect ruling for AIG and FNMA shareholders.

 

Greenberg wins, good for FNMA/FMCC as gov found wrong/acted illegally.

 

No damages so AIG not going to pay out. (It would'nt have anyway as AIG was not responsible for damages if govt acted illegally, ie loss as they did).

 

As a shareholder for both I am happy, bet Berkowitz is too.

 

Seems odd to me. The reason no damages were awarded because the judge says that Greenberg failed to show the harm to shareholders given that the alternative was an AIG bankruptcy with no government support; however, that wasn't the only alternative. The alternative was that AIG receive support under similar terms given to other massively troubled financial institutions at the time. I haven't read the full docs - just an article or two covering the decision so it could be the judge is giving credit to the gov't claims that no bailout would have happened without the equity kicker, but it seems like a strange line of reasoning assuming that bankruptcy was the only other alternative just because the government said so...

 

The issue here isn't that the interest rate was too high -- the issue here is that the Federal Reserve did not have to authority to extract an equity payment based on its statutory authority under 13(3). Once it's established that the government did something wrong, which it did, then the question turned to "what was the harm?" In this case, the question was "but for the loan, what would shareholders have gotten?" And the answer was nothing -- and the interest rate was irrelevant to whether AIG would have gone bankrupt absent the loan.

 

Is this the wrong way to interpret the AIG decision? (my thoughts below)...

 

Bottom-line: gov't acted illegally. As an FNMAS shareholder I don't care about 2008, I care about 2012... and the fact that 2008 may have been illegal makes the 2012 net worth sweep a more likely win.

 

I heard someone mention that this could be construed as "The Fairholme Ruling" -- doesn't hurt AIG but helps FNMA. The bottom line is that the government acted illegally by exacting value from the shareholders. The reason they don't have to pay anything in AIG is that "but for" the loan, the AIG shareholders would have gotten nothing -- in the Fannie Mae situation, "but for" the 2012 Amendment, the FNMA shareholders would have been significantly better off financially.

 

My take on yesterday's ruling is 180 degrees away from all the other posts.  The judge's ruling was that the takeover of AIG by the FED was illegal but that there is not a valid claim because absent the takeover, the company would have been worthless. AIG's recovery of value after the takeover  apparently was not sufficient to trump the fact that the stock would have been worthless without that intervention.

 

That doesn't seem just to me, but there seems to be a large amount of risk that the same logic could be applied to Fannie and Freddie. Am I missing something here?

 

[meiroy]

Looks like the perfect ruling for AIG and FNMA shareholders.

 

Greenberg wins, good for FNMA/FMCC as gov found wrong/acted illegally.

 

No damages so AIG not going to pay out. (It would'nt have anyway as AIG was not responsible for damages if govt acted illegally, ie loss as they did).

 

As a shareholder for both I am happy, bet Berkowitz is too.

 

Seems odd to me. The reason no damages were awarded because the judge says that Greenberg failed to show the harm to shareholders given that the alternative was an AIG bankruptcy with no government support; however, that wasn't the only alternative. The alternative was that AIG receive support under similar terms given to other massively troubled financial institutions at the time. I haven't read the full docs - just an article or two covering the decision so it could be the judge is giving credit to the gov't claims that no bailout would have happened without the equity kicker, but it seems like a strange line of reasoning assuming that bankruptcy was the only other alternative just because the government said so...

 

The issue here isn't that the interest rate was too high -- the issue here is that the Federal Reserve did not have to authority to extract an equity payment based on its statutory authority under 13(3). Once it's established that the government did something wrong, which it did, then the question turned to "what was the harm?" In this case, the question was "but for the loan, what would shareholders have gotten?" And the answer was nothing -- and the interest rate was irrelevant to whether AIG would have gone bankrupt absent the loan.

 

Is this the wrong way to interpret the AIG decision? (my thoughts below)...

 

Bottom-line: gov't acted illegally. As an FNMAS shareholder I don't care about 2008, I care about 2012... and the fact that 2008 may have been illegal makes the 2012 net worth sweep a more likely win.

 

I heard someone mention that this could be construed as "The Fairholme Ruling" -- doesn't hurt AIG but helps FNMA. The bottom line is that the government acted illegally by exacting value from the shareholders. The reason they don't have to pay anything in AIG is that "but for" the loan, the AIG shareholders would have gotten nothing -- in the Fannie Mae situation, "but for" the 2012 Amendment, the FNMA shareholders would have been significantly better off financially.

 

My take on yesterday's ruling is 180 degrees away from all the other posts.  The judge's ruling was that the takeover of AIG by the FED was illegal but that there is not a valid claim because absent the takeover, the company would have been worthless. AIG's recovery of value after the takeover  apparently was not sufficient to trump the fact that the stock would have been worthless without that intervention.

 

That doesn't seem just to me, but there seems to be a large amount of risk that the same logic could be applied to Fannie and Freddie. Am I missing something here?

 

That's exactly how I read it too. It was illegal because there was no supporting law but otherwise common would be 0.

[muscleman]

That doesn't seem just to me, but there seems to be a large amount of risk that the same logic could be applied to Fannie and Freddie. Am I missing something here?

 

Are you suggesting that without the 2012 3rd amendment, FNMA and FMCC would be worthless anyway, so there is no fair compensation to shareholders? That logic doesn't resonate in my head.  ::) In fact I think that's what the government lawyer is suggesting all the time. They said they think FNMA and FMCC would be unlikely to return to profitability and unlikely to repay the senior preferred, so that's why they adjusted  the terms. But facts suggest that the fact is exactly the opposite.

Fairholme is not suing the 2008 bailout of FNMA and FMCC for its previous common shareholders. It just argues about the 2012 3rd amendment.

 

[merkhet]

My take on yesterday's ruling is 180 degrees away from all the other posts.  The judge's ruling was that the takeover of AIG by the FED was illegal but that there is not a valid claim because absent the takeover, the company would have been worthless. AIG's recovery of value after the takeover  apparently was not sufficient to trump the fact that the stock would have been worthless without that intervention.

 

That doesn't seem just to me, but there seems to be a large amount of risk that the same logic could be applied to Fannie and Freddie. Am I missing something here?

 

I think the risk that the same logic could be applied to Fannie and Freddie on economic loss analysis is close to zero. Correct me if I'm wrong, but you're saying one of two things:

 

(1) Fannie & Freddie would have been worthless without the initial bailout of 2008, or

(2) Fannie & Freddie would have been worthless without the initial bailout of 2008 and therefore any subsequent events are linked back to the initial bailout of 2008

 

Since no one outside of Washington Federal is saying that there was an illegal exaction or Takings Clause violation from the 2008 bailout, it doesn't seem like (1) applies. The only possibility for the government to use this language is to argue (2) -- however, that's a difficult row to hoe. Imagine, then, if the government were to confiscate value from GM tomorrow (or even AIG tomorrow) -- if the logic of (2) is correct, then the natural extension would be that once the government has saved your company from bankruptcy, all future actions the government takes are either permissible or require no payment.

 

In the Fannie & Freddie case, if you follow Wheeler's logic:

 

The Federal Circuit’s guidance in a case of this type requires that Starr show its economic loss. “[P]roving economic loss requires a plaintiff to show what use or value its property would have but for the government action.” A&D Auto Sales, Inc. v. United States, 748 F.3d 1142, 1157 (Fed. Cir. 2014). The analysis here leads to the conclusion that, if the Government had done nothing to rescue AIG, the company would have gone bankrupt, and the shareholders’ equity interest would have been worthless. Accordingly, the Court finds that the first plaintiff class prevails on liability because of the Government’s illegal exaction, but recovers zero damages.

 

The correct method of analyzing the damages caused by the Third Amendment is to ask the question of what the preferred (and/or common) be worth "but for the [Third Amendment]." In our instant case, we can see exactly what happened in the years following the Third Amendment -- namely, record profitability, so the damages aspect is pretty clear to me.

[Luke 532]

Todd Sullivan of ValuePlays.net on AIG/Fannie...

http://www.valueplays.net/2015/06/16/from-aig-to-gse/

[Luke 532]

The correct method of analyzing the damages caused by the Third Amendment is to ask the question of what the preferred (and/or common) be worth "but for the [Third Amendment]." In our instant case, we can see exactly what happened in the years following the Third Amendment -- namely, record profitability, so the damages aspect is pretty clear to me.

 

I agree.  I think the odds of a victory for FNMAS either through the courts or via settlement has increased.  I added to my position yesterday.

[orthopa]

The correct method of analyzing the damages caused by the Third Amendment is to ask the question of what the preferred (and/or common) be worth "but for the [Third Amendment]." In our instant case, we can see exactly what happened in the years following the Third Amendment -- namely, record profitability, so the damages aspect is pretty clear to me.

 

Exactly, that is the difference here. The net sweep was done when FnF was not going to be bankrupt.

 

 

[jawn619]

so when do we get our money?

[twacowfca]

My take on yesterday's ruling is 180 degrees away from all the other posts.  The judge's ruling was that the takeover of AIG by the FED was illegal but that there is not a valid claim because absent the takeover, the company would have been worthless. AIG's recovery of value after the takeover  apparently was not sufficient to trump the fact that the stock would have been worthless without that intervention.

 

That doesn't seem just to me, but there seems to be a large amount of risk that the same logic could be applied to Fannie and Freddie. Am I missing something here?

 

I think the risk that the same logic could be applied to Fannie and Freddie on economic loss analysis is close to zero. Correct me if I'm wrong, but you're saying one of two things:

 

(1) Fannie & Freddie would have been worthless without the initial bailout of 2008, or

(2) Fannie & Freddie would have been worthless without the initial bailout of 2008 and therefore any subsequent events are linked back to the initial bailout of 2008

 

Since no one outside of Washington Federal is saying that there was an illegal exaction or Takings Clause violation from the 2008 bailout, it doesn't seem like (1) applies. The only possibility for the government to use this language is to argue (2) -- however, that's a difficult row to hoe. Imagine, then, if the government were to confiscate value from GM tomorrow (or even AIG tomorrow) -- if the logic of (2) is correct, then the natural extension would be that once the government has saved your company from bankruptcy, all future actions the government takes are either permissible or require no payment.

 

In the Fannie & Freddie case, if you follow Wheeler's logic:

 

The Federal Circuit’s guidance in a case of this type requires that Starr show its economic loss. “[P]roving economic loss requires a plaintiff to show what use or value its property would have but for the government action.” A&D Auto Sales, Inc. v. United States, 748 F.3d 1142, 1157 (Fed. Cir. 2014). The analysis here leads to the conclusion that, if the Government had done nothing to rescue AIG, the company would have gone bankrupt, and the shareholders’ equity interest would have been worthless. Accordingly, the Court finds that the first plaintiff class prevails on liability because of the Government’s illegal exaction, but recovers zero damages.

 

The correct method of analyzing the damages caused by the Third Amendment is to ask the question of what the preferred (and/or common) be worth "but for the [Third Amendment]." In our instant case, we can see exactly what happened in the years following the Third Amendment -- namely, record profitability, so the damages aspect is pretty clear to me.

 

I'm sympathetic to that argument, but I'm not the judge. There is ample precedent for disregarding future improvements that might have accrued to equity after the government judges that a company is bankrupt. This happens frequently with insolvent banks seized by the Feds and then quickly married off to a new owner.  If that bank turns around, the gains  generally belong to the new owner.

 

There is no Cpt11 in these situations allowing time for equity to recover while being protected from creditors claims.

 

[Guest Schwab711]

so when do we get our money?

 

I think the AIG decision fits pretty nicely with the government's incentives. I don't mean for this to be a conspiracy post, just how I see things. The AIG decision seems necessary (both the result and damage awarded) because it builds the necessary Fannie/Freddie defense that will protect the profits for the US Treasury. That is, in 2012 FnF were barely profitable and that profitability was only due to the significant liquidity provided previously. The common, again, should have been zero. Seems like a similar outcome is coming for FnF shareholders...

 

When will this case be decided and by which federal judge seems more important for predicting the outcome than an educated opinion based on the actual case and evidence (since this is presumably new legal territory, it could likely go either way). All federal judicial posts are presidentially appointed, so the outcome of the case may have consequences for the ruling judge's career progression. There's also a long history of the standard interpretation of laws/precedents changing to fit current incentives or the 'consensus view' of "justice" for a specific situation, when the case involves new legal territory of significant societal or monetary importance (national well-being cases). The executive branch (and implicitly, the legislative branch, as well) have made their opinions of the case well known and there is very little current public support for tax payers to restitute wealthy "Wall Street" investors, which is impossible to ignore for federal judges.

 

http://www.nytimes.com/2015/02/15/business/after-the-housing-crisis-a-cash-flood-and-silence.html?_r=0

 

Does this concern anyone else following the AIG ruling? I have no position, just playing devil's advocate for an extremely interesting case/situation.

[merkhet]

I'm sympathetic to that argument, but I'm not the judge. There is ample precedent for disregarding future improvements that might have accrued to equity after the government judges that a company is bankrupt. This happens frequently with insolvent banks seized by the Feds and then quickly married off to a new owner.  If that bank turns around, the gains  generally belong to the new owner.

 

There is no Cpt11 in these situations allowing time for equity to recover while being protected from creditors claims.

 

I think the difference is that in those cases (1) the government actually declares a bankruptcy, i.e. there is a receivership with specific rules and the equity is actually wiped out, and (2) the "new owner" is a private entity. I think it would be unprecedented to both not have a declared bankruptcy and have the new owner be the United States government.

 

The fact that there is no Chapter 11 in those situations is exactly what causes this case to be different, IMO. Here, there is a de facto Chapter 11.

 

I think the AIG decision fits pretty nicely with the government's incentives. I don't mean for this to be a conspiracy post, just how I see things. The AIG decision seems necessary (both the result and damage awarded) because it builds the necessary Fannie/Freddie defense that will protect the profits for the US Treasury. That is, in 2012 FnF were barely profitable and that profitability was only due to the significant liquidity provided previously. The common, again, should have been zero. Seems like a similar outcome is coming for FnF shareholders...

 

If you read the Wheeler opinion, the court asks "but for" the alleged action, what would have been the economic position of the shareholders. Here, the alleged action is the 2012 amendment and not the original 2008 bailout -- again, you'd have to "stack" it as twacowcfa has suggested, but I don't think that there is enough precedent to make that type of a connection given the distinguishing facts in this case.

 

When will this case be decided and by which federal judge seems more important for predicting the outcome than an educated opinion based on the actual case and evidence (since this is presumably new legal territory, it could likely go either way). All federal judicial posts are presidentially appointed, so the outcome of the case may have consequences for the ruling judge's career progression. There's also a long history of the standard interpretation of laws/precedents changing to fit current incentives or the 'consensus view' of "justice" for a specific situation, when the case involves new legal territory of significant societal or monetary importance (national well-being cases). The executive branch (and implicitly, the legislative branch, as well) have made their opinions of the case well known and there is very little current public support for tax payers to restitute wealthy "Wall Street" investors, which is impossible to ignore for federal judges.

 

http://www.nytimes.com/2015/02/15/business/after-the-housing-crisis-a-cash-flood-and-silence.html?_r=0

 

Does this concern anyone else following the AIG ruling? I have no position, just playing devil's advocate for an extremely interesting case/situation.

 

This is the least distressing part of the case to me. If you listen to everything that Judge Sweeney has been saying in the courtrooms, I think that a politically motivated judgment against the Fannie & Freddie shareholders is the least likely outcome. If anything, she's politically motivated against the Government.

 

Wheeler is also a Republican appointee -- I don't know that this factors into her decision at all -- but a win for the Democrats here is not really going to help her chances moving on up the chain.

[merkhet]

FWIW, I think the action is actually going to be on the unsealing of the Ugoletti deposition.

[Sunrider]

FWIW, I think the action is actually going to be on the unsealing of the Ugoletti deposition.

 

When do you think this will happen?

 

thanks - C.

[merkhet]

FWIW, I think the action is actually going to be on the unsealing of the Ugoletti deposition.

 

When do you think this will happen?

 

thanks - C.

 

The government reply on the motion to unseal Ugoletti's deposition is due on June 29th. My guess is that a rebuttal will be due July 15th. So you might get a decision a month or so after that.

 

http://www.ft.com/intl/cms/s/0/45a86570-1441-11e5-ad6e-00144feabdc0.html?siteedition=intl

 

However, if Bruce et. al. are correct in their assumption that the government swept the profits away in order to buy time on the sequester (and were able to prove it in Ugoletti's deposition), then I don't think we ever get to see an unsealed deposition.

 

“Any notion of a ‘death spiral’ was fiction,” said Mr Berkowitz of Fairholme. “Fannie Mae and Freddie Mac performed as promised, had mountains of cash and generated cash during the financial crisis. Reported losses were the result of decisions by a handful of government officials to reflect a doomsday scenario that did not and could not occur.”

 

But the hedge funds contend that the Obama administration and FHFA were well aware that Fannie and Freddie were about to become very profitable, that sweeping all their profits gave a useful source of income to the public purse at a time of wrangling over the debt ceiling and that the new structure deprived other shareholders of any hope of sharing in this improved situation, unlike shareholders in other bailed-out companies, such as AIG.

[Mephistopheles]

FWIW, I think the action is actually going to be on the unsealing of the Ugoletti deposition.

 

When do you think this will happen?

 

thanks - C.

 

The government reply on the motion to unseal Ugoletti's deposition is due on June 29th. My guess is that a rebuttal will be due July 15th. So you might get a decision a month or so after that.

 

http://www.ft.com/intl/cms/s/0/45a86570-1441-11e5-ad6e-00144feabdc0.html?siteedition=intl

 

However, if Bruce et. al. are correct in their assumption that the government swept the profits away in order to buy time on the sequester (and were able to prove it in Ugoletti's deposition), then I don't think we ever get to see an unsealed deposition.

 

 

Are you implying that the government would rather settle than allow such a deposition to be public?

[merkhet]

If the deposition is damaging enough, then yes. The only problem is that it's difficult to know how damaging the deposition is given that we are all on the outside looking in.