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

[doughishere]

how i feel after this month.....

[Luke 532]

Steele's Brief in opposition to Motion to Dismiss attached...

Steele_1-15-2016_1_of_5.pdf

Steele_1-15-2016_2_of_5.pdf

Steele_1-15-2016_3_of_5.pdf

Steele_1-15-2016_4_of_5.pdf

Steele_1-15-2016_5_of_5.pdf

[Luke 532]

To expedite the process of finding out whether or not the NWS is illegal in Virginia and/or Delaware, Steele is asking Sleet to pose the question to those states' courts.  Document attached.

Steele_1-15-2016_NWS_in_DE-VA.pdf

[merkhet]

http://gselinks.com/Court_Filings/Perry/14-5243-1593998.pdf

 

It is ORDERED, on the court's own motion, that this case be scheduled for oral argument on April 15, 2016, at 9:30 A.M. The composition of the argument panel will usually be revealed thirty days prior to the date of oral argument on the court's web site at www.cadc.uscourts.gov.

 

The time and date of oral argument will not change absent further order of the Court.

 

A separate order will be issued regarding the allocation of time for argument.

 

Balls. I will not be in town that day for the oral arguments. :(

[merkhet]

Steele's Brief in opposition to Motion to Dismiss attached...

 

About what I expected. Good arguments, but I am probably biased.

 

To expedite the process of finding out whether or not the NWS is illegal in Virginia and/or Delaware, Steele is asking Sleet to pose the question to those states' courts.  Document attached.

 

This is a good move.

[Mephistopheles]

If we win, I'm throwing a huge party - everyone here is invited.

 

Byob though, so plan ahead.

[Jurgis]

Byob though

 

Bring your own lawyer too!  8)

[onyx1]

From the Application to Delaware and Virginia Supreme Courts:

 

 

"Were the Net Worth Sweep to be

upheld as permissible under Delaware and Virginia law, a very troubling precedent would be set

for those states’ corporate laws, for stockholders of corporations of those states, and for the

mergers and acquisitions community as a whole, because such precedent would appear to extend

equally to corporations not under conservatorship and without the federal government as their

senior preferred stockholder, and thereby permit the directors of a Delaware or Virginia

corporation unilaterally to contract away all of the net worth and profits of the corporation for all

time to a single preferred stockholder."

 

 

This doesn't appear to be a very strong argument to me.  Currently, a corporation can basically contract away almost all a companies net worth and profits by setting a preferred dividend equal to 10,000% x the common dividend.  What is so troubling?  The difference between all, and all but a few pennies is insignificant to me.

 

 

 

[Guest cherzeca]

@onyx

 

you make a fair point, but i believe that both sleet will want to certify the question so that the state courts will answer the state law question, and the state courts will want to answer it when it is certified by sleet to them.  this will make it easier for sleet to deny motion to dismiss, since it means he knows he will not have to rule on an issue of first impression regarding delaware corporate law, where he knows he doesn't have the background/experience to handle the issue like the state supreme courts.  also, it will be interesting to see whether the two courts rule simultaneously, if sleet denies motion, certifies and states accept certification.  last thing states want is a split verdict, so i expect there to be "coordination".

 

so as to your teenie weenie argument (see http://seekingalpha.com/article/3522006-fannie-freddie-and-the-difference-between-power-and-authority-part-ii) i think the delaware supreme court in particular would be very interested in deciding this issue.  if, as i would expect, they rule not only on the basis of statutory construction but also on the basis of the fiduciary duty that a board owes the common when it considers the terms of the preferred, then not only would boards not be able to accomplish a total theft of the residual for the benefit of the preferred (statutory construction), but they will be very cautious about even approaching that bright line (fiduciary duty).

 

capiche?

[Guest cherzeca]

http://gselinks.com/Court_Filings/Perry/14-5243-1593998.pdf

 

It is ORDERED, on the court's own motion, that this case be scheduled for oral argument on April 15, 2016, at 9:30 A.M. The composition of the argument panel will usually be revealed thirty days prior to the date of oral argument on the court's web site at www.cadc.uscourts.gov.

 

The time and date of oral argument will not change absent further order of the Court.

 

A separate order will be issued regarding the allocation of time for argument.

 

Balls. I will not be in town that day for the oral arguments. :(

 

how do you get into audience? just wait in line morning of?

[onyx1]

Thanks for your thoughts Christian.

 

so as to your teenie weenie argument (see http://seekingalpha.com/article/3522006-fannie-freddie-and-the-difference-between-power-and-authority-part-ii) i think the delaware supreme court in particular would be very interested in deciding this issue.  if, as i would expect, they rule not only on the basis of statutory construction but also on the basis of the fiduciary duty that a board owes the common when it considers the terms of the preferred, then not only would boards not be able to accomplish a total theft of the residual for the benefit of the preferred (statutory construction), but they will be very cautious about even approaching that bright line (fiduciary duty).

 

I understand your point, and reason that is why Steele used 73 pages to make many different agruements so as to give context, rather than just argue on the single narrow point of state law.

 

also, it will be interesting to see whether the two courts rule simultaneously, if sleet denies motion, certifies and states accept certification.  last thing states want is a split verdict, so i expect there to be "coordination".

 

This thought occurred to me as well.  Is there a risk of owning the wrong GSE?  A split decision would be a nightmare of the "so close and yet so far" variety.  Please help me understand more about what you mean by "coordination", such as how that would work, or any precedents.

[merkhet]

http://gselinks.com/Court_Filings/Perry/14-5243-1593998.pdf

 

It is ORDERED, on the court's own motion, that this case be scheduled for oral argument on April 15, 2016, at 9:30 A.M. The composition of the argument panel will usually be revealed thirty days prior to the date of oral argument on the court's web site at www.cadc.uscourts.gov.

 

The time and date of oral argument will not change absent further order of the Court.

 

A separate order will be issued regarding the allocation of time for argument.

 

Balls. I will not be in town that day for the oral arguments. :(

 

how do you get into audience? just wait in line morning of?

 

Yup. That's how it's worked for the Court of Federal Claims so far -- except when the status conferences are sealed.

 

@onyx, I would look at the 99% vs 100% issue in the context of Steele's arguments about expropriation of value for the majority. The two (rates/preference and fiduciary duty) work in concert.

[Guest cherzeca]

@onyx

 

"This thought occurred to me as well.  Is there a risk of owning the wrong GSE?  A split decision would be a nightmare of the "so close and yet so far" variety.  Please help me understand more about what you mean by "coordination", such as how that would work, or any precedents."

 

delaware is the king of corporate law, in terms of its corporate statute, and court decisions applying the statute and the common law of fiduciary duty that underlies the statute.  the virginia corporate law "follows" delaware.  there is no way virginia wants to be out of sync with delaware.

 

so to be blunt, i would expect virginia supreme ct to read the draft delaware supreme ct opinion before it writes its own.

 

btw, as to the 99%/100% argument, note that the govt has not asserted this, at least as of yet.  if they assert it in an argument to the supreme cts upon certification, it would undercut their argument that the statute allows 100%.  yes they can argue 99% as a fall back position, and then say that the difference between 99% and 100% shouldnt be determinative, but that is a grasping at straws position

 

[onyx1]

Christian & Merkhet, thanks for sharing your comments and insight.

[doughishere]

This is all the saxton reply right?

 

[merkhet]

This is all the saxton reply right?

 

This is the Delaware case, Jacobs.

[doughishere]

This is all the saxton reply right?

 

This is the Delaware case, Jacobs.

 

Duh.

[hardincap]

@cherzeca

 

What are your general thoughts on the reply brief? Any surprises or interesting takeaways?

 

I was underwhelmed with his rebuttal to the transfer argument (@p39). He doesnt seem to directly dispute the government's assertion that the nws constitutes a transfer of assets, and is therefore within its conservator power. He argues on the purpose of the transfer of assets--that it is inconsistent with its conservatorship duty to put fnma in sound and solvent condition--making it a "why" analysis, prohibited by the HERA anti-injunction provision. Shouldn't he have argued instead that this power does not extend into issuing issuing pref stock that is inconsistent with dcgl?

 

[Guest cherzeca]

@cherzeca

 

What are your general thoughts on the reply brief? Any surprises or interesting takeaways?

 

I was underwhelmed with his rebuttal to the transfer argument (@p39). He doesnt seem to directly dispute the government's assertion that the nws constitutes a transfer of assets, and is therefore within its conservator power. He argues on the purpose of the transfer of assets--that it is inconsistent with its conservatorship duty to put fnma in sound and solvent condition--making it a "why" analysis, prohibited by the HERA anti-injunction provision. Shouldn't he have argued instead that this power does not extend into issuing issuing pref stock that is inconsistent with dcgl?

 

he does argue instead that this power does not extend into issuing issuing pref stock that is inconsistent with dcgl

 

core of the argument begins on p. 20- 24 (top), and picks up again with last paragraph on p.34 to top of p.38.  in essence, steele is saying we can talk all we want about conservator powers to manage the business and transfer assets, there is no conservator power to issue preferred stock like the NWS.  fnma directors couldn't do it before conservatorship, and there is nothing in HERA that authorizes fhfa to do it in conservatorship, since with respect to corporate stock issuances, fhfa can only do what the corporate directors could do in the setting of preferred stock terms.  it is a delaware corporate law issue, not a federal law issue under HERA.

 

now, i am not saying that the arguments that fhfa acted beyond its conservator powers and functions insofar as it failed to conserve and preserve are bad arguments.  steele makes these arguments, and the perry appeal makes these arguments, and i think lamberth will be reversed based upon these arguments.

 

but what steele has going for him in hindes/jacobs that the perry arguments do not have (although steele has an amicus brief in perry) is that even if lamberth doesn't get overturned on analyzing the conservator powers to conserve and preserve, the NWS fails because the method that fhfa chose to conserve and preserve/transfer assets, the issuance of the NWS, is independently invalid under an applicable rule of decision other than HERA, namely DGCL.

 

will do a full analysis when i free up a bit

[hardincap]

Net Worth Sweep [cannot] be sustained as an exercise of FHFA’s authority under HERA to “transfer or sell any asset” of Fannie or Freddie. Section 4617(b)(2)(G) specifies that FHFA may only transfer assets “as conservator or receiver,” , and FHFA was not acting in either capacity when it transferred the entirety of the Fannie Mae’s and Freddie Mac’s residual economic value from private investors to another government agency in exchange for virtually nothing

 

would have liked to see it clearly stated here that NWS is not an exercise of power to transfer because the power to transfer does not permit issuance of stock that conflict with delaware corporate law, but I guess that would be redundant because he makes that point indirectly prior to this section.

 

thanks for your thoughts

[merkhet]

Net Worth Sweep [cannot] be sustained as an exercise of FHFA’s authority under HERA to “transfer or sell any asset” of Fannie or Freddie. Section 4617(b)(2)(G) specifies that FHFA may only transfer assets “as conservator or receiver,” , and FHFA was not acting in either capacity when it transferred the entirety of the Fannie Mae’s and Freddie Mac’s residual economic value from private investors to another government agency in exchange for virtually nothing

 

would have liked to see it clearly stated here that NWS is not an exercise of power to transfer because the power to transfer does not permit issuance of stock that conflict with delaware corporate law, but I guess that would be redundant because he makes that point indirectly prior to this section.

 

thanks for your thoughts

 

Legal briefs often follow a particular template where the lawyer argues "this is wrong because (A)," "but even if you think that (A) is permissible, it is still wrong under (B)," etc.

[hardincap]

that makes sense. w/o that structure it would be a messy entanglement of separate arguments

[hardincap]

Were the Net Worth Sweep to be upheld as permissible under Delaware and Virginia law, a very troubling precedent would be set for those states’ corporate laws, for stockholders of corporations of those states, and for the mergers and acquisitions community as a whole, because such precedent would appear to extend equally to corporations not under conservatorship and without the federal government as their senior preferred stockholder, and thereby permit the directors of a Delaware or Virginia corporation unilaterally to contract away all of the net worth and profits of the corporation for all time to a single preferred stockholder.

 

how do you reject this argument?

[Luke 532]

Were the Net Worth Sweep to be upheld as permissible under Delaware and Virginia law, a very troubling precedent would be set for those states’ corporate laws, for stockholders of corporations of those states, and for the mergers and acquisitions community as a whole, because such precedent would appear to extend equally to corporations not under conservatorship and without the federal government as their senior preferred stockholder, and thereby permit the directors of a Delaware or Virginia corporation unilaterally to contract away all of the net worth and profits of the corporation for all time to a single preferred stockholder.

 

how do you reject this argument?

 

You can't, which is why we're going to win.  Just a matter of time.

[Guest cherzeca]

Were the Net Worth Sweep to be upheld as permissible under Delaware and Virginia law, a very troubling precedent would be set for those states’ corporate laws, for stockholders of corporations of those states, and for the mergers and acquisitions community as a whole, because such precedent would appear to extend equally to corporations not under conservatorship and without the federal government as their senior preferred stockholder, and thereby permit the directors of a Delaware or Virginia corporation unilaterally to contract away all of the net worth and profits of the corporation for all time to a single preferred stockholder.

 

how do you reject this argument?

 

govt has to win on federal preemption, that HERA somehow has created a conflict with delaware law in the area of permissible preferred stock terms, and the steele reply does a good job on showing there is no preemption.

 

there is a slim chance that sleet finds that the anti-injunction bar in HERA prevents his court from examining legality of NWS under delaware law, but i dont think even lamberth would so hold

 

meanwhile the fnma share prices are in toilet.  if you have conviction and nerve, great time to add.