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

[merkhet]

I have no idea what he was thinking. No point in speculating.

 

My main issue with Lamberth is that he interprets HERA as authorizing FHFA to do anything rather than just a few things. In other words, I don't think FHFA is allowed to act arbitrarily while Lamberth thinks it is allowed to do so.

 

But, of course, you have to allow for the fact that I might not be objective given that I have chosen a side on this one.

[Guest cherzeca]

A question for all but esp. for cherzeca and merk: if you believe lamberth overreached in his decision to dismiss the perry lawsuit, how do you get comfortable with the risk that sweeney, sleet, and others could do the same? The Delaware case seems solid, esp. coming from a former chief justice, but the perry case seemed just as solid. Yet we saw in Lamberth's ruling what Epstein warned us about, that federal judges tend to give "enormous discretion to the government no matter how outrageous its conduct". If Lamberth will essentially evade the question of whether the NWS constitutes a securities transaction, for e.g., saying that that argument "reaches too far", how do you get comfortable that Sleet wont do the same in regards to Steele's argument that preferreds must bear preferential relationship to the dividends payable on the commons?

 

Pepto Bismol. Large quantities. Costco helps.

 

At the end of the day, legal decisions are mostly rational but not entirely so. It was a low probability event, in my opinion, for Lamberth to rule as he did. It's similarly a low probability event that Sleet or Sweeney will rule similarly, but not a non-zero one.

 

great question and answer, hardincap and merkhet

 

yes, i have been asking myself whether we can have a "Lamberth II" periodically.  indeed, add to lamberth the decision by wheeler in starr, where he whimped out on damages.  the truthful answer is that we might get Lamberth II, but after having been a lawyer for about 35 years, you appreciate that there are errors made in the trenches of district court and errors corrected on appeal.  quite common.  indeed, as you say hardincap, the lack of rigor that lamberth displayed on the securities purchase after sunset date question stands out like a sore thumb to an appellate court judge.  if lamberth made the analysis, to say that the securities law principle doesnt apply, or that it does apply but here is why it was not violated, then the appellate judge would sense that there was a real judgment made, whether right or wrong, in the court below.  but when the appellate judges see lamberth's shimmy and shake, i tend to think their backbones will stiffen.

 

having said that, all i can rely upon is legal analysis and analytic rigor, which i think favors the plaintiffs, salted with an appreciation for legal realism which is a fancy way of saying that judges sometimes dont have the balls to do what their brains tell them to do.  as for steele arguing the delaware corporate law argument, i think the only way he loses there is if judge sleet agrees with govt that anything govt does under conservatorship is an "exercise" of its power to run the GSEs business....including issuing stock in a manner that it doesn't have the corporate power to do.  that is a vomit argument which would call for stuff even stronger than pepto bismol if it succeeds.

[Eye4Valu]

Instead of a Lamberth 2, how about a Winstar 2.

 

http://cyber.law.harvard.edu/rfi/papers/damages.PDF

 

 

[Guest cherzeca]

hey eye

 

reference a little opaque for me, but i did scan the paper...awakened fond memories of 1L contract remedies discussions. seems the author went on to MS where he advised treasury on the AIG bailout, where incidentally the damages shoe may fall for treasury on appeal

[Luke 532]

Yet another plaintiff wanting to amend their complaint (attached) based on what they've found (or what has been shared with them) in discovery.  The more time that passes the more information found via discovery and that information is being shared with numerous plaintiffs in other courts.  The passage of time is frustrating and requires great patience, but the trade-off is one could reason that each court case with access to discovery materials is likely getting stronger for the plaintiffs.  I like that a lot.

 

FNMAS_Saxton_Amended_Complaint_12-31-2015.pdf

[doughishere]

Two Cheers for Fannie and Freddie Synthetic CDOs

 

http://www.creditslips.org/creditslips/2015/12/a-tentative-two-cheers-for-fannie-and-freddie-cdos.html

[hardincap]

as for steele arguing the delaware corporate law argument, i think the only way he loses there is if judge sleet agrees with govt that anything govt does under conservatorship is an "exercise" of its power to run the GSEs business....including issuing stock in a manner that it doesn't have the corporate power to do.  that is a vomit argument which would call for stuff even stronger than pepto bismol if it succeeds.

 

What are your thoughts on the possibility that Steele is reading too much into 151©? He is arguing that taking 100% of net worth necessarily means there is no "rate", nor is there “preference to, or in relation to” other classes of stock, e.g common stock. Could this be taken as subjective (biased) interpretation rather than objective reasoning?

[Guest cherzeca]

@hardincap

 

this is a nuanced argument, directed to a case of first impression, since i can assure you that there has never been a NWS before by a delaware corporation.  so there is no precedent.

 

i think it is a good argument.  preferred stock bears a preferential relationship to common stock in the entire structure of the DGCL.  preferred stock cannot usurp common stock's residual claim.  i call it a category mistake.  151c assumes this, by its language and structure.  i have worked on deals with participating preferreds and have looked at the issue as to whether a preferred can participate in the residual on a preferential basis to the common (ie participate in the dividend without dollar limit (but there always was a % limit) and be preferred on liquidation), and have opined, as do all other firms who have looked at it, that a preferred need not be limited as to dividends, but had to bear a relation to the common dividend such that a common dividend was not an impossibility.  now, one may wonder whether the relationship could be one of 100% usurpation, but i dont think that the 151c language bears that weight (and govt has not made that argument). 

 

if you read govt's reply, they dont address steele's argument.  they argue that the DGCL is permissive generally, which is true, and leaves the relation between the preferred and common to the board of directors.  then why does 151c state that the preferred must set forth the preferential relation between the preferred and common?  govt's logic implies that the preferential relation may be 100-0, but govt doesn't say so explicitly in brief.  perhaps it didnt like the way it looked in black and white.

 

there is a twin to this argument, which is that no one in control of corp, who owes a fiduciary duty to common, could ever issue a preferred that eliminated all economic interest in the common.  plaintiffs also argue that conservatorship involves such a fiduciary duty, which govt denies. but 151c does not depend upon the existence on a fiduciary duty, but certainly is consistent with it.

[hardincap]

Thanks for adding some color here. Whether 151c precludes 100-0 preferential relation between preferred and common is the $150bn question. It may be a good argument, but seems far from a "slam dunk", do you agree?

 

In regards to "existence vs exercise" of power, the government argues that 3rd A was indeed an exercise of conservator power given HERA's authorization to "transfer or sell any asset of the [enterprises]" (pg 15). Why is this wrong? Further, does this not constitute a conflict with DCGL 151c, and hence preempt it?

[merkhet]

Thanks for adding some color here. Whether 151c precludes 100-0 preferential relation between preferred and common is the $150bn question. It may be a good argument, but seems far from a "slam dunk", do you agree?

 

Chris should give his thoughts on this one, but I think this is about as close to a "slam dunk" as you can get when it comes to the law.

 

In regards to "existence vs exercise" of power, the government argues that 3rd A was indeed an exercise of conservator power given HERA's authorization to "transfer or sell any asset of the [enterprises]" (pg 15). Why is this wrong? Further, does this not constitute a conflict with DCGL 151c, and hence preempt it?

 

So the issue is whether the transfer is (A) completely able to be arbitrary, i.e. the conservator could have just signed all the assets over to me for nothing or (B) whether it has to follow certain rules/law. I strongly suspect that the answer is (B) and not (A). Then the question is what laws it has to follow, which is your preemption issue.

 

Now, preemption is a very specific legal term of art. (https://en.wikipedia.org/wiki/Federal_preemption#Evidence_of_Congressional_intent_to_preempt)

 

So basically, you have three questions:

 

(1) Was there express preemption?

Well, no, because HERA doesn't explicitly state preemption.

 

(2) Was there conflict preemption?

 

Is it possible to comply with both federal and state laws in this instance? Sure. There was no requirement that the conservator act in this manner. So there seems to be no conflict preemption.

Is it discernible at the time that Congress passed HERA that Congress implicitly wanted to overwrite the DGCL for these purposes? Well, it doesn't seem like it. So there also seems to be no obstacle preemption. (Note, this is separate from merely whether the state law is an obstacle in the colloquial sense, because if that was the test, then this would literally just collapse into a test of whether state law is different than federal law.)

 

(3) Was there field preemption?

 

Again, probably not because no part of HERA actually dealt with changing the rules on preferred stock and/or common stock.

[hardincap]

So the issue is whether the transfer is (A) completely able to be arbitrary, i.e. the conservator could have just signed all the assets over to me for nothing or (B) whether it has to follow certain rules/law. I strongly suspect that the answer is (B) and not (A). Then the question is what laws it has to follow, which is your preemption issue.

 

In Lamberth's view, whether the transfer was arbitrary necessarily requires a why as opposed to what analysis, and hence is barred from judicial inquiry by HERA's anti-injunction provision. A what analysis involves an examination of the existence of conservator power, and is not barred by the anti-injunction provision. The government is arguing that the 100-0 usurpation fits "squarely" within the powers granted to FHFA as conservator under HERA's transfer clause, and this makes it a why not what analysis, barring it from judicial review. It also seems to me this could be construed as constituting a conflict with 151c, and hence preempts it? That is, HERA grants as conservator power an action that 151c prohibits, effectively overriding it.

[merkhet]

So the issue is whether the transfer is (A) completely able to be arbitrary, i.e. the conservator could have just signed all the assets over to me for nothing or (B) whether it has to follow certain rules/law. I strongly suspect that the answer is (B) and not (A). Then the question is what laws it has to follow, which is your preemption issue.

 

In Lamberth's view, whether the transfer was arbitrary necessarily requires a why as opposed to what analysis, and hence is barred from judicial inquiry by HERA's anti-injunction provision. A what analysis involves an examination of the existence of conservator power, and is not barred by the anti-injunction provision. The government is arguing that the 100-0 usurpation fits "squarely" within the powers granted to FHFA as conservator under HERA's transfer clause, and this makes it a why not what analysis, barring it from judicial review. It also seems to me this could be construed as constituting a conflict with 151c, and hence preempts it? That is, HERA grants as conservator power an action that 151c prohibits, effectively overriding it.

 

Bah, I shouldn't have used the word arbitrary given that it has connotations with the "arbitrary and capricious" standard under the APA. Imagine that I removed the part containing arbitrary and inserted "has the power to do whatever it wants."

 

Proceed along what you call the what analysis. The question is, squarely, "does HERA allow the FHFA to rewrite/override the DGCL"? And that is a preemption issue. And you are absolutely correct that there is, in fact, a conflict with the DGCL -- but that's not the end of the legal analysis. If it were, then preemption case law would literally be an algorithm of:

 

Is there a conflict? If so, then preempted. If there is not, then not preempted.

 

The entire case law of preemption would then be superfluous.

[hardincap]

Is it possible to comply with both federal and state laws in this instance? Sure. There was no requirement that the conservator act in this manner. So there seems to be no conflict preemption.

 

Can you explain this a bit further? The government is arguing that while there was no requirement, per se, to issue a 100-0 preferential stock (in relation to commons), there was indeed specific authority to, granted by HERA. Consummating this authorized action necessarily overrides 151c,  therefore it is not possible to comply with both federal and state law in this instance.

[merkhet]

Is it possible to comply with both federal and state laws in this instance? Sure. There was no requirement that the conservator act in this manner. So there seems to be no conflict preemption.

 

Can you explain this a bit further? The government is arguing that while there was no requirement, per se, to issue a 100-0 preferential stock (in relation to commons), there was indeed specific authority to, granted by HERA. Consummating this authorized action necessarily overrides 151c,  therefore it is not possible to comply with both federal and state law in this instance.

 

I would read Florida Lime. https://supreme.justia.com/cases/federal/us/373/132/case.html

[Guest cherzeca]

Is it possible to comply with both federal and state laws in this instance? Sure. There was no requirement that the conservator act in this manner. So there seems to be no conflict preemption.

 

Can you explain this a bit further? The government is arguing that while there was no requirement, per se, to issue a 100-0 preferential stock (in relation to commons), there was indeed specific authority to, granted by HERA. Consummating this authorized action necessarily overrides 151c,  therefore it is not possible to comply with both federal and state law in this instance.

 

 

I would read Florida Lime. https://supreme.justia.com/cases/federal/us/373/132/case.html

 

@hardincap read epstein at

 

http://www.forbes.com/sites/richardepstein/2015/12/16/fannie-and-freddie-in-the-dock-will-shareholders-find-relief-under-state-or-federal-law/?utm_campaign=yahootix&partner=yahootix

 

he has a good discussion of conflict preemption, referring to the o'melveney case

 

you are asking good questions, hardincap, but there is some background to the extreme reading of the conservatorship power under HERA, and that this the argument that there is no fiduciary responsibility that conservator owes conservatee which colors the inquiry whether anything under the blue sky is doable by conservator as an exercise of its power. 

 

rule of law guy made clear in http://seekingalpha.com/article/3723466-why-hindes-jacobs-plaintiffs-will-prevail-in-the-fannie-mae-and-freddie-mac-delaware-litigation that not even lamberth went this far, as he actually went to a (faulty) analysis of the sunset provision on securities purchases under HERA.  if the "exercise" argument was as strong as govt asserts in hindes/jacobs's reply brief, lamberth would have not gone to the analysis, but would have simply said that the jurisdictional bar applies to this claim as well

 

so even taking lamberth's opinion at face value, the hindes/jacobs court must look at the DGCL argument.

 

capiche?

 

it is my suspicion that once judge sleet gets by the jurisdictional bar of anti-injunction provision and notes that there is no preemption and delaware law applies, he may be very well inclined to have delaware supreme court render advisory opinion on this core issue of delaware corp law, since it is also a case of first impression

 

 

 

 

[Guest cherzeca]

Is it possible to comply with both federal and state laws in this instance? Sure. There was no requirement that the conservator act in this manner. So there seems to be no conflict preemption.

 

Can you explain this a bit further? The government is arguing that while there was no requirement, per se, to issue a 100-0 preferential stock (in relation to commons), there was indeed specific authority to, granted by HERA. Consummating this authorized action necessarily overrides 151c,  therefore it is not possible to comply with both federal and state law in this instance.

 

put another way, when HERA gave fhfa the power to act as conservator, HERA made clear that the conservator assumed the rights that the directors and officers had to manage the GSEs' businesses.  so HERA's stating that the conservator had the right to manage the businesses was not really necessary as the conservator had the right when it assumed the powers of the directors and officers.  now, if fhfa wants to do something that the directors and officers couldnt do, like issue NWS pref stock, then you would have to find federal statutory authorization for that, and there is none.

 

so the inquiry is not that of an exercise of power, but that of is there a power

[hardincap]

now, if fhfa wants to do something that the directors and officers couldnt do, like issue NWS pref stock, then you would have to find federal statutory authorization for that, and there is none.

 

so the inquiry is not that of an exercise of power, but that of is there a power

 

chris, maybe I'm being obtuse, but you seem to be overlooking the government’s argument that FHFA did actually have the power to issue the NWS pref stock, because HERA authorized them to “transfer or sell any asset” (pg 15 of motion to dismiss).  I’m trying to understand why this argument will not fly with judge sleet. I have yet to read Florida lime but epstein seems to be saying conflict preemption would require more legal specificity in authorizing preferred stock with provisions inconsistent with 151c, and the "transfer or sell any asset" clause does not meet that bar

[Guest cherzeca]

@hardincap

 

"the government’s argument that FHFA did actually have the power to issue the NWS pref stock, because HERA authorized them to “transfer or sell any asset” (pg 15 of motion to dismiss)"

 

this really doesn't pass red face test.  corporate power to issue stock is governed by delaware law (fnma) unless there is a provision regarding stock issuance in HERA.  there is not.  the power to transfer assets and manage the business are conservator powers, and govt is saying that anything conservator does is an exercise of these powers, not subject to court review.  but can conservator exercise these powers by doing individual acts for which it doesn't have corporate power to do?  the govt's argument requires you to agree with this. 

 

is a court foreclosed from reviewing an exercise of an admitted power where that exercise takes the form of an act for which the govt doesnt have power?

 

can the conservator expand its powers to do acts for which it doesnt have the power by claiming the act is an exercise of another power?

 

isnt the issuance of NWS pref stock an act of the power to issue pref stock, which is governed by delaware law unless preempted by a HERA provision relating to corporate stock issuances?

 

it is good that you have read govt's motion brief closely.  i would advise that you also read plaintiffs reply brief closely, due 1/16/16.  then you will have a balanced view of the arguments to weigh, one contra other

[doughishere]

Am i weird in feeling that this fannie and freddie mess is starting to get noticed more and more......I mean when a global head of currencies at from one of the big I-banks talks about the govt draggin their feet.....i mean say what you will about the ibanks but at least they are acknowledging whats going on.

[hardincap]

Chris, thanks for clarifying your thoughts here, it is very much appreciated. This issue has stirred passions on both sides of the debate and alot of smart people seem to be letting their emotions compromise their analysis on the investment merits of these stocks. I thought it prudent to give the government's argument full benefit of the doubt, steele's dismissive attitude notwithstanding. Looking forward to his reply brief.

[Guest cherzeca]

@hardincap

 

appreciate your pushing to clarify my thoughts

 

essentially i think this case comes down to a simple matter of statutory construction.  there is a bar to judicial review in HERA.  these bars are usually strictly construed, unless the language is expansive and clear.

 

when i say "is a court foreclosed from reviewing an exercise of an admitted power where that exercise takes the form of an act for which the govt doesnt have power? ", i believe the court will look at the anti-injunction provision and say, ok, the court can't review an act where that act is directly attributable to an exercise of a power (a sale of assets for $x as opposed to $y), but i also think that the court will review an act when that act is clearly an exercise of a distinct power whose existence has been called into question (issue NWS pref).

 

preferred stock was amended with very different terms (i am not even going to assert that a new security was issued...that is perry's argument not made in hindes/jacobs).  do GSEs have power to have pref stock outstanding with these terms? do i as a judge look to the corporate power to issue capital stock, or the corporate power to transfer assets (or even manage the business).  which of these powers should i view as having been invoked and exercised when there was a change to the NWS pref terms?

 

the govt's argument is essentially that because the conservator has the power to get out of the bed in the morning, anything it does is an exercise of that power.

 

i don't think that is the proper interpretation of the HERA statutory judicial review bar, and as rule of law guy points out, this is consistent even with lamberth's view (who appeared visibly hostile to the GSEs at every turn), where he looked at the securities purchase argument and did not simply say, this is an amendment of a contract which conservator had power to do, but went on to examine whether the amended senior preferred stock involved a securities purchase (which was a specific power that perry alleged the conservator could not do).

 

what are you referring to when you say steele's dismissive attitude?

[BeerBBQ]

I read this commentary on a SA post http://seekingalpha.com/user/326415/comments

 

"And although no one has mentioned it publicly, HERA allows and I think it has been the government's plan all along to slowly strip away the corporate assets and then convert the conservatorships into a receivership (thereby wiping out the existing unsecured creditors and shareholders). On track to have most of their assets erased by then, that action was targeted for 2018. Their work will be carried on by the new successor corporation described in HERA, with the groundwork for its new operations now being put into place via the CSP and CSS programs now being implemented by the companies."

 

This comment reminded me of page 84 of Hera Legislation (https://www.gpo.gov/fdsys/pkg/PLAW-110publ289/pdf/PLAW-110publ289.pdf) under paragrapgh D of section 4 titled Mandatory Receivership (bottom of page 83) that says:

 

"‘‘(D) RECEIVERSHIP TERMINATES CONSERVATORSHIP.—

The appointment of the Agency as receiver of a regulated

entity under this section shall immediately terminate any

conservator"

 

Does anyone have any thoughts on this?  If the court challenges fail, is this how shareholders will lose?

 

 

 

 

[hardincap]

do GSEs have power to have pref stock outstanding with these terms? do i as a judge look to the corporate power to issue capital stock, or the corporate power to transfer assets (or even manage the business).  which of these powers should i view as having been invoked and exercised when there was a change to the NWS pref terms?

 

That makes sense to me, but I am also operating under the assumption that government lawyers are not morons, and must have thought they had a decent shot at arguing that nws falls under the "transfer assets" power. The SA article examining the implications of the government's assertion of plenary power does make it seem like an egregious overreach, but it also didn't specifically address the "transfer of assets" clause that the government points to in its defense. (Maybe I'm being unreasonably nitpicky here, since its hard to imagine this part being the swing factor). Adding to my cautiousness is what you referred to as legal realism--"judges not having the balls to do what their brains tell them to do"--esp. considering what's at stake.

 

re: steele's attitude, I was referring to the investors unite call. btw, i missed the question you asked on the call, but i'm guessing it was on this very issue we're discussing, the power vs duty claim?

[Eye4Valu]

As we all know, the only opinions that matter belong to the judges. Everyone here can debate these points all day and night trying to get comfortable with their position or lack thereof.  Even if I think the plaintiffs have the better legal arguments, a return on investment is far from assured. The only question in my mind is what is my risk tolerance toward FNMAS. Its a question only I can answer, and is probably the best question of all.

[Guest cherzeca]

"Even if I think the plaintiffs have the better legal arguments, a return on investment is far from assured. "

 

fnma is a speculative investment.  there is no margin of safety.

 

i thought steele was quite straight up on the call.  he had just read the govt's motion and i think he was annoyed at the BS that the govt was trying to pull, re setting forth the facts (which must be construed to be true as plaintiff has alleged them) in a way favorable to govt.

 

i was particularly pleased with the energy and conviction he expressed on the call, noting that he has never felt this engaged before (or something to that effect).  when i heard that he wouldnt delve into substance, i just asked whether plaintiffs attys were collaborating, and he confirmed they were, but each atty had final say re own case, which is as should be.

 

i agree what we say here is mostly just self-preening, which is why i am eager to read the steele reply brief.