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I am listening to the call right now. I suggest all listen if possible
Do not ignore the statements made in this short clip. Think about what he is saying. "not to just follow the law but to be attentive to the administration. Watch this short clip.
http://investorsunite.org/ed-demarco-former-acting-director-fhfa-violates-hera/
Agreed sir.
Dick Bove Gets Backup On Fannie Mae And Freddie Mac
by admin on Tuesday, October 7th, 2014 | No Comments
Bove shares an open letter from journalist David Fiderer to help back up his argument that the GSEs are essential
If you’ve been following Rafferty Capital Markets VP Richard Bove’s commentary on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), you know that he considers the GSEs to be essential parts of the US economy that the government liquidates at all of our peril. In light of the recent setback to GSE shareholders, he’s decided to take another shot at explaining the theory and brought in another banking expert to back him up for good measure.
Solutions to the wrong problems put in place, says Bove
Bove’s version of what happened during the financial crisis focuses a lot more on global macro trends and less on moral hazard than the typical rendition. The sequence of events that he sees is the population growth ‘outside the North Atlantic communities’ (eg India and China, as opposed to the UK and US) meant that there was an abundance of cheap labor to produce goods for consumption in the West, causing huge flows of capital to these developing economies. Since those countries couldn’t absorb so much capital so quickly, investors sent that money back to the West where it quickly outpaced the amount of responsible investment opportunities and new assets were created to meet the rising demand, resulting in a lot weaker loans being issued and new investment products being created.
“The shortsighted view that greedy bankers created the financial crisis has done this nation incredible harm. This is because solutions have been put in place to solve the wrong problem,” writes Bove. In particular, he has argued repeatedly that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have been a backbone of the economy and that, far from putting us in more danger, they played the safety valve role that they were intended to play during a crisis.
“The failure to understand the importance of the 30-year fixed-rate, self-amortizing mortgage; what is needed to create it; and why it cannot be lost is going to lead the people of this country into massive losses in wealth that no one seems to remotely understand,” he writes.
Fannie Mae, Freddie Mac: Bove gets support from fellow bull Fiderer
“Whenever the private market failed–as it did with the SL crises of the early 1980s and early 1990s, and in the aftermath of the collapse of the private securities market in 2007 onward–the GSEs have stepped in to staunch a market collapse that would have been much worse,” writes journalist and GSE bull David Fiderer in an open letter to Bove.
Fiderer argues that if other lenders had followed Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s lead in sticking to higher credit standards thirty-year fixed-rate mortgages instead of fighting for market share with risk layering and sub-prime mortgages, there never would have been a crisis in the first place.
Below is the full letter from David Fiderer
Dick
I take a less all-encompassing macro view of things. In a nutshell, I believe that a New Deal innovation, the fixed-rate self-amortizing mortgage loan (which initially began with a 15-year tenor and, beginning in 1948 was increased to 30-years), brought about stability in housing finance.
It all worked just fine until the dismantling of Bretton Woods and the inevitable deregulation of interest rates. More specifically, FRMs became imperiled by Paul Volker’s anti-inflation medicine, which caused the thrifts to become insolvent. The only way that 30-year FRMs could be maintained, during and after Volker’s tenure at the Fed, was through Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), which, until the 1990s, were the only balance sheet lenders with nationwide footprints.
The GSEs’ ability to diversify risks, with regard to location and market timing, could not be matched, then or now. This broad diversification, plus economies of scale, enabled the GSEs to effectively manage the interest rate risk on their balance sheets through interest rate derivatives.
Similarly, only Fannie Mae and Freddie Mac could issue mortgage backed securities that transferred interest rate risk but not credit risk. (All GSE MBS benefitted from corporate guarantees.) The risk profile of private label securities–static portfolios of same-vintage loans in liquidation–can never match the risk diversification of GSE mortgage securities.
Whenever the private market failed–as it did with the SL crises of the early 1980s and early 1990s, and in the aftermath of the collapse of the private securities market in 2007 onward–Fannie Mae and Freddie Mac have stepped in to staunch a market collapse that would have been much worse.
The common trop, that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) were only successful because of implicit government backing, is belied by their unmatched loan performance, and, by their consistent profitability.
As a bank analyst, you certainly understand the difference between a liquidity crisis and insolvency, which is based on a number of GAAP timing differences. The GSEs became “insolvent” because of the loss of deferred tax assets and excessively pessimistic loan loss provisions, which were both reversed last year. Unlike all the other 2008 bailouts, the drawdowns of government funds were never needed to support day-to-day operations or any current debt obligations. Of course the government’s unfunded commitment gave Fannie Mae and Freddie Mac the ability to stabilize the mortgage markets when all other players had exited. But that government backstop benefitted all mortgage creditors, not just Fannie Mae and Freddie Mac.
The way I see it, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) business model has been an extraordinary success. There never would have been any kind of mortgage crisis if all lenders issued FRMs and followed the GSEs credit standards.
http://originatortimes.com/freddie-mac/dick-bove-gets-backup-on-fannie-mae-and-freddie-mac/
Fannie and Freddie investors turn to the ‘people’s court’
By Gina Chon in Washington
©Bloomberg
A US court better known for hearing tax refund complaints has become the preferred venue for shareholder lawsuits against the US government over its rescues of AIG, and mortgage finance companies Fannie Mae and Freddie Mac.
Located near the White House and the imposing Treasury Department – one of the agencies often cited in this recent spate of lawsuits – the Court of Federal Claims is based in a nondescript red-brick building that is easy to miss.
Editorial Ending the one-way bet on US housing finance
Fannie and Freddie sold off as suit fails
Lex Fannie/Freddie – no Argentine bond
Ackman plans second suit against US over Fannie and Freddie bailout
This façade suited its image as the “people’s court,” as it was the venue that heard all kinds of money claims against the US government – for tax refunds, contract work and both civilian and military pay.
But, more recently, the court has gained a reputation for lending a sympathetic ear to major investors angry about government bailouts – including former AIG chief executive Hank Greenberg, who has sued the government over the $182bn bailout of the insurance group and is seeking $40bn in damages.
The Federal Claims court is also where Bruce Berkowitz’s Fairholme Funds has sued the government over the profits of mortgage finance companies Fannie Mae and Freddie Mac, which received a $188bn bailout in 2008. In August, Bill Ackman’s Pershing Square filed a similar lawsuit against the government over Fannie and Freddie in the Federal Claims court.
Other courts have thrown out cases like these. Last week, a US District Court dismissed a separate Fairholme lawsuit over Fannie and Freddie. An appeals court also rejected claims by Mr Greenberg in another AIG lawsuit, and the US Supreme Court declined to hear his case in June.
However, the Federal Claims court has so far allowed Fairholme’s lawsuit on Fannie and Freddie to proceed, and proceedings in Mr Greenberg’s AIG case began at the end of September.
“The complexity of the submissions and the factual disagreements strongly point to the need for a trial,” Federal Claims judge Thomas Wheeler said of the AIG case.
As a result, former Treasury secretaries Hank Paulson and Tim Geithner and former Federal Reserve chairman Ben Bernanke are all attending the Federal Claims court this week for that case.
“It is increasingly being seen as the place to go for these kinds of cases,” said one lawyer who has appeared before the court. “The judges there think these cases have enough merit to at least hear them out. They are seeing something that other courts have not seen.”
But Lewis Wiener, head of the Federal Claims Bar Association, said the shareholders in the financial crisis lawsuits will not necessarily have the upper hand, as they are up against tough lawyers from the Department of Justice
“The court has a lot of integrity and sympathies don’t play into it,” said Mr Wiener, a partner at Sutherland Asbill & Brennan. “The government is represented by excellent attorneys so it’s a pretty fair fight.”
Both the AIG and Fannie-Freddie lawsuits accuse the government of violating the US constitution because shareholders allege they were not justly compensated for the takeover of the companies. All of the companies have recovered, and the government has received payments from them that exceed the total it committed to bail them out.
The government has argued it had the authority to rescue the companies in the way it did because of the severity of the financial crisis, and noted that the purpose of the bailouts was to save the US economy, not benefit the shareholders.
Already, proceedings in the AIG case have been affecting the Fannie-Freddie suit – even though they are distinct and being heard by separate Federal Claims judges. Earlier this year, the US government argued that it should not be forced to release certain documents in the Fannie-Freddie case because sealed testimony by Messrs Geithner, Paulson and Bernanke in the AIG lawsuit had been leaked to the media.
Federal Claims judge Margaret Sweeney said she would impose restrictions to guard against leaks in the Fannie-Freddie case. Messrs Geithner and Paulson could be called to give evidence in that case as well.
http://www.ft.com/intl/cms/s/0/8041eb76-4a3d-11e4-8de3-00144feab7de.html#axzz3FT5Pk9vn
I understand.
Are You Smarter Than A 5th Grader? Ed DeMarco Hopes You Aren’t link to video
Are You Smarter Than A 5th Grader? Ed DeMarco Hopes You Aren’t
Ask a fifth grader how laws are made and you’ll hear about an abbreviated committee process, Floor votes in the U.S. House and U.S. Senate, a White House signing ceremony, and the federal courts upholding laws if questions of constitutionality arise. What you will not hear is about how unelected bureaucrats interpret laws themselves and apply them in ways perhaps unintended.
Take the Housing and Economic Recovery Act of 2008, for example. Written and signed into law in the wake of the financial meltdown, the act created the Federal Housing Finance Agency and led to the creation the conservatorship into which Fannie Mae and Freddie Mac were placed. There are few who would argue that the two mortgage giants weren’t in need of significant reforms. But it was an act of Congress that created the entities – government-sponsored enterprises – and another act of Congress is required to institute changes.
Unless you’re Ed DeMarco – then apparently you get to interpret laws anyway you want.
A few weeks ago, the Bipartisan Policy Committee hosted its annual Housing Summit and featured DeMarco, the man put in charge of FHFA after it was chartered. New federal agencies don’t come along every day, and being put in charge of one from the outset must seem like a pretty heady proposition, especially one that’s charged with overseeing the two entities that are responsible for underpinning the U.S. housing market. During a wide-ranging panel, DeMarco said the following:
“During my tenure, I believe that FHFA had a responsibility not just to operate the conservatorships according to the law, but to be attentive to the direction the administration and lawmakers were going.”
That’s an interesting “belief.” How does it square with what is stated within HERA about FHFA’s role, though?
FHFA powers as conservator, as outlined by HERA: is to “take such action as may be—(i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.” [12 USC § 4617(b)(2)(D).]
The act is pretty clear on what it intended FHFA to do and how the agency was to act toward Fannie and Freddie, yet DeMarco admits that he expanded on the agency’s responsibilities because he had certain understandings based on conversations with Members of Congress and the Administration. If there is enough support in Congress to change a law, then the law gets changed; or, the Administration may issue an executive order to enact rules or clarify regulations. What should not happen is an unelected bureaucrat deciding for himself to expand sections of laws to areas never considered, like the unconstitutional takings of private property without compensation.
http://investorsunite.org/ed-demarco-former-acting-director-fhfa-violates-hera/
Yes sir Z. I can not help but believe we will succeed. I have bought more on these BIG drops in order to have more and to average down that way. This is not a penny stock as you know regardless of where it is trading. One fifth of the U.S. economy trading on pink sheets. Just read that last sentence. Hell I think it all the time. Now I have typed it and it looks like a bigger travesty. I will hold until this country (through the courts or congress or the federal government) comes to it's senses.
cheerleader plug GO FnF!!!
Fannie Mae: America’s attitude toward housing rebounds
Is it too late to save housing this year?
Jacob Gaffney
October 7, 2014 9:14
Reversing a two-month trend where the average American is down on his or her housing prospects, the latest Fannie Mae housing survey shows this attitude markedly changed in the last month.
"In September, the share of consumers who say now is a good time to buy a home is back up to 68%, a four-percentage-point increase from August. Additionally, the share saying they would prefer to buy a home on their next move ticked back up to 66% after a three-point drop.
The results also show a notable jump in consumers’ views toward the economy, with 40% of those surveyed saying it is now on the right track – a five percentage point increase from last month."
During the past few months, the Fannie Mae survey of 1,000 Americans, who were interviewed by phone, cited geo-pilitcal factors as heavily weighing on their conscience.
Doug Duncan, senior vice president and chief economist at Fannie Mae said: “It might be too late to save this year’s home sales from posting the first decline in five years.
“However, the return to an upward trend in housing sentiment, combined with this month’s positive news on the jobs front, suggests that a broad-based, albeit measured, housing recovery is on track to resume in 2015,” Duncan added.
“The results of the past few months show that consumer optimism remains cautious and somewhat volatile, and we’ll likely continue to see bumps on the housing recovery path reflected in our survey results,” he concludes.
http://www.housingwire.com/articles/31625-fannie-mae-americas-attitude-toward-housing-rebounds
Yesterday Fnma did exactly what some posters predicted it would do. It gapped on the open. I could have sold and then bought back in later when profit takers/flippers were doing their thing. I am just too damn scared to be out of this stock. Who knows when there will be news that we are free from cship? I should say when we get confirmation of a plan for release. Maybe if I was a little smarter I could get in and out and back in but I am not that smart or careless so I am in this puppy until release. Then I may put myself through more pain by holding for uplist and then dividends. More Maalox please.
Fannie, Freddie investors undaunted by court loss
By Joseph Lawler | October 7, 2014 | 5:00 am
Investors in the Fannie Mae and Freddie Mac are undaunted in their efforts to challenge the government’s terms of the bailouts for the government-sponsored enterprises, despite a big recent setback.
Tim Pagliara, the executive director of the group representing Fannie and Freddie shareholders, said that having a lawsuit thrown out of federal court wouldn’t set back his efforts, saying “the rule of law needs to be applied. This is a bankruptcy without rules right now.”
The legal campaign against the Treasury’s 2012 decision to sweep all profits from the two businesses into the Treasury failed its first major test last week. Judge Royce Lamberth of the U.S. District Court for the District of Columbia dismissed the case, writing that "the plaintiffs' grievance is really with Congress itself” for writing the 2008 law that set up the bailout of Fannie and Freddie.
The stock market also viewed the ruling as a near-death blow for the investors' legal case, with shares of the two companies dropping by nearly half. While the companies were delisted from major exchanges following their 2008 collapse brought on by the housing bust, shares are still traded off-exchange.
Despite the setback, Pagliara argued that Lamberth’s logic could lead other courts to look at the constitutionality of the 2008 law itself.
“That is what is before Judge [Margaret] Sweeney and the U.S. Court of Federal Claims,” Pagliara said, referring to a case in which investors have been granted a motion to conduct fact-finding to look into the basis of the Treasury’s 2012 decision to take all of the government-sponsored enterprises’ profits.
With a case pending in the Southern District Court in Iowa, the Federal Claims case concerns the “constitutional issues of the unlawful seizure of property,” said Pagliara’s group, Investors Unite. Investors Unite represents many shareholders in the government-sponsored enterprises, from individuals to activist hedge funds.
A representative of Fairholme Funds, one of the activist hedge funds that brought the lawsuits in both the District and Federal Claims courts, told the Washington Examiner that “although litigation is a lengthy process, shareholder-owned Fannie Mae and Freddie Mac remain vitally important and increasingly valuable to all constituents”, adding that “we will vigorously pursue the enforcement of existing contractual claims and our inalienable rights of property ownership as guaranteed by the United States Constitution.”
Fairholme and others are “likely to get a more fair hearing than they did with Judge Lamberth” in the Federal Claims case, said John Berlau, a fellow at the Competitive Enterprise Institute. CEI is one of 17 free-market think tanks that have called on the Treasury to reverse its collection of Fannie and Freddie’s profits in the name of property rights.
“We’ve been arguing for decades that Fannie and Freddie were receiving government subsidies” and distorting the housing market, said Berlau, “but it’s no answer to say that in this special case it’s OK to violate shareholder rights and contracts.”
Unlike Investors Unite, Berlau favors winding down Fannie and Freddie and replacing them with a system of private capital for mortgage insurance. Investors Unite aims to have the companies recapitalized, reformed and returned to the private sector.
Berlau suggested that the investors’ initial loss in court shows how long the route to legal victory would be. “I think it may make some kind of a deal possible” legislatively, Berlau said, “just because these investors now know it may take years going through the courts.”
Pagliara agreed that legislation “may move faster than the courts,” but argued it would take the form of a bill to privatize Fannie and Freddie, not undo them. “It’s a wildcard."
Investors Unite is planning to hold a conference call Tuesday with Richard Epstein, a prominent libertarian professor of law at New York University who has consulted for some of the hedge funds involved in the suits, to lay out the legal path for investors.
http://washingtonexaminer.com/fannie-freddie-investors-undaunted-by-court-loss/article/2554467?custom_click=rss
Americans' Attitudes on Housing Return to Positive Trend
Indicators Suggest Continued Modest Recovery in 2015
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WASHINGTON, Oct. 7, 2014 /PRNewswire/ -- Following a recent dip in consumer housing optimism, most indicators have rebounded to the modestly positive trend seen throughout 2014, according to results from Fannie Mae's September 2014 National Housing Survey. Turbulent geo-political factors likely weighed on Americans' attitudes toward the housing market during the past couple of months. In September, the share of consumers who say now is a good time to buy a home is back up to 68 percent, a four-percentage-point increase from August. Additionally, the share saying they would prefer to buy a home on their next move ticked back up to 66 percent after a three-point drop. The results also show a notable jump in consumers' views toward the economy, with 40 percent of those surveyed saying it is now on the right track – a five percentage point increase from last month.
"The September National Housing Survey shows a slight recovery in consumer housing sentiment after a two-month setback, bringing us back to the modestly positive trend we've seen over the last year," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "It might be too late to save this year's home sales from posting the first decline in five years. However, the return to an upward trend in housing sentiment, combined with this month's positive news on the jobs front, suggests that a broad-based, albeit measured, housing recovery is on track to resume in 2015. The results of the past few months show that consumer optimism remains cautious and somewhat volatile, and we'll likely continue to see bumps on the housing recovery path reflected in our survey results."
SURVEY HIGHLIGHTS
Homeownership and Renting
•The average 12-month home price change expectation rose to 2.2 percent.
•The share of respondents who say home prices will go up in the next 12 months rose to 45 percent. The share who say home prices will go down decreased to 8 percent.
•The share of respondents who say mortgage rates will go up in the next 12 months fell by five percentage points to 45 percent.
•Those who say it is a good time to buy a house rose to 68 percent. Those who say it is a good time to sell also increased—to 39 percent.
•The average 12-month rental price change expectation fell to 3.2 percent.
•The percentage of respondents who expect home rental prices to go up in the next 12 months increased to 55 percent.
•The share of respondents who think it would be difficult to get a home mortgage today decreased by one percentage point.
•The share who say they would buy if they were going to move rose to 66 percent, while the share who would rent decreased to 28 percent.
The Economy and Household Finances
•The share of respondents who say the economy is on the right track jumped by five percentage points from last month to 40 percent.
•The percentage of respondents who expect their personal financial situation to get better over the next 12 months fell to 41 percent.
•The share of respondents who say their household income is significantly higher than it was 12 months ago increased by two percentage points to 25 percent.
•The share of respondents who say their household expenses are significantly higher than they were 12 months ago increased slightly to 37 percent.
The most detailed consumer attitudinal survey of its kind, the Fannie Mae National Housing Survey polled 1,000 Americans via live telephone interview to assess their attitudes toward owning and renting a home, home and rental price changes, homeownership distress, the economy, household finances, and overall consumer confidence. Homeowners and renters are asked more than 100 questions used to track attitudinal shifts (findings are compared to the same survey conducted monthly beginning June 2010). Fannie Mae conducts this survey and shares monthly and quarterly results so that we may help industry partners and market participants target our collective efforts to stabilize the housing market in the near-term, and provide support in the future.
For detailed findings from the September 2014 survey, as well as a podcast providing an audio synopsis of the survey results and technical notes on survey methodology and questions asked of respondents associated with each monthly indicator, please visit the Fannie Mae Monthly National Housing Survey page on fanniemae.com. Also available on the site are in-depth topic analyses, which provide a detailed assessment of combined data results from three monthly studies. The September 2014 Fannie Mae National Housing Survey was conducted between September 2, 2014 and September 22, 2014. Most of the data collection occurred during the first two weeks of this period. Interviews were conducted by Penn Schoen Berland, in coordination with Fannie Mae.
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR Group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.
http://www.prnewswire.com/news-releases/americans-attitudes-on-housing-return-to-positive-trend-278361871.html
Fannie Mae: Judge Sweeney Wants Discovery On Whether FHFA Was Directed To Enter The Sweep Amendment
Oct. 7, 2014 8:39 AM ET
•Some Commentators Who Approve Judge Lamberth’s Dismissal of Claims Against FHFA and Treasury Think Judge Sweeney Will Defer to Judge Lamberth’s Decision.
•Those Commentators Point to Gracious Remarks Judge Sweeney made about Judge Lamberth.
•A transcript from Judge Sweeney’s Fannie Mae proceeding indicates she wants discovery on whether FHFA was acting at the direction of the Executive or Congress with Treasury or the White House.
•Judge Sweeney explicitly warns FHFA and Treasury counsel not to use privilege to hide responsive documents.
•Judge Sweeney will be guided by her own very different interpretation of the case.
As everyone who tracks the Fannie Mae (TICKLER: OTCQB:OTCQB:FNMA) litigation knows, on September 30, 2014, Judge Lamberth dismissed all the plaintiffs' claims. In a prior Seeking Alpha article, I (among others) pointed out that Judge Sweeney of the Federal Court of Claims, who is also presiding over claims against FHFA and Treasury, was not bound by Judge Lamberth's decision and would have a very different take on the claims against Fannie.
Not all share this view. John Carney wrote an editorial in the Wall Street Journal saying in part:
“
"Judge Sweeney described Judge Lamberth as someone "that I esteem and admire greatly." She added that he spoke at her investiture, the swearing in ceremony for federal judges. That isn't exactly the best setup for a case in which attorneys need to argue Judge Lamberth got the law wrong in his case." Wall Street Journal, October 2, 2014, pages C1 and C10.
A reader forwarded to me the full transcript of the May 7, 2014, hearing in Fairholme Funds, Inc., Et al. v. USA from which the quote was taken. The relevant portion reads:
THE COURT: I do have one question, unless I should save this for the Justice Department, but I guess it was in docket number 39, reply in support of Defendant's proposed plan for discovery, the Justice Department notes that the District Court has - I guess there's a --- docket 33 and 34 in the Fairholme case that's - I believe it's in front of Judge Lamberth -
MR. COOPER: That right.
THE COURT: Someone that I esteem and admire greatly and who spoke at my -
MR. COOPER: Investiture?
THE COURT: -- introduction to the -- my investiture, thank you. There was - I guess you all were awaiting a ruling from him on the motion to supplement the administrative record.
The implication that others have attempted to draw from this is that Judge Sweeney has such great deference for Judge Lamberth that his opinion will sway her.
What is more persuasive is a very different quote from Judge Sweeney taken from the August 2014, Fannie litigation status conference (again, a gracious reader made this transcript available). The excerpt is Judge Sweeney addressing lawyers for FHFA and Treasury in the context of FHFA and Treasury arguing against turning over documents in discovery.
Judge Sweeney:
“
"... but the whole purpose of this exercise, that is before me now, is to allow the plaintiff to have their day in court and for them to have the opportunity to explore whether or not the United States Government, whether you are talking about Treasury or whoever it was, whether they directed the conservatorships to take certain actions, whether they were really the guiding force and therefore they really were not independent... or at least for the purpose of the net worth sweep acting at the direction of the United States government.
Whether the conservators were taking marching orders from within the United States government, regardless of the branch, whether you are talking about the Executive... or whether it was Congress working in conjunction with the White House or Treasury, whoever might be, then that information has to be brought forward.
Now, that information has to be provided to the plaintiff because it is not fair for the United States government to say to the plaintiff that Freddie Mac and Fannie Mae are independent, there was no exercise of control and then the Justice Department receives documents showing, in fact, these agencies... that there was control.
I know you are fine attorneys, people of integrity, but I am just saying... and you probably haven't seen all the documents, but I don't want any instructions given to clients... or these entities (Fannie and Freddie) that they don't have to produce certain documents... if in fact, they are going to answer the question "Were these entities part of the United States government or were they controlled by Treasury". If that is what the documents show, you have to turn them over to the plaintiff.
So... if you are invoking privilege to block the plaintiff's entry way into the courthouse door... you can't do it. I know you know that but you can go back and tell your clients I said so... and that might make their lives easier or more difficult... or perhaps both, …"
A little legal background: The Federal Rules of Civil Procedure (FRCP) Rule 37 addresses sanctions for failure to obey a discovery order. The sanctions include:
1) Deciding disputed facts against the party who did not produce documents.
2) Prohibiting the "disobedient party" from supporting or defending a claim related to the failure to comply with discover
3) Striking some or all of a pleading (That means a party would be deemed to have not made a filing necessary to make or defend a claim or motion.)
4) Dismissing the action in whole or in part.
5) Rendering a default judgment against the disobedient party.
6) Treating the failure to obey a discovery order as contempt. (Fines or jail time until the contempt is corrected.)
Judges take a willful failure to comply with discover extremely seriously because a failure to comply undermines the entire court system. For the litigation attorney, being caught willfully failing to comply means public sanctioning of a client, loss of a case, loss of clients, professional disgrace and for particularly egregious conduct, disbarment. Every litigation attorney knows this and judges know they know it.
With this as context, Judge Sweeney's statements are extraordinary. First, she explicitly says that the purpose of the discovery is to investigate whether FHFA was truly acting independently or was following instructions from the Executive [Branch] or from Congress working in conjunction with the White House or Treasury. Second, she speaks on the record to warn counsel for the government to not abuse privilege and hide documents.
It more likely than not that Judge Sweeney has a very different sense of the Fannie litigation than Judge Lamberth. Professional esteem aside, Judge Sweeney will be guided by her own sense of the case.
http://seekingalpha.com/article/2545255-fannie-mae-judge-sweeney-wants-discovery-on-whether-fhfa-was-directed-to-enter-the-sweep-amendment
Thanks Rocco
link to a biased Time article. I could not copy and paste it here. The author helped Geithner write his book.
http://time.com/3475826/aig-lawsuit-geithner-bernanke-greenberg/
The Bailout Scorecard
Last update: Oct. 6, 2014
Altogether, accounting for both the TARP and the Fannie and Freddie bailout, $613B has gone out the door—invested, loaned, or paid out—while $388B has been returned.
The Treasury has been earning a return on most of the money invested or loaned. So far, it has earned $271B. When those revenues are taken into account, the government has realized a $46.2B profit as of Oct. 6, 2014.
The TARP
$475B
Total Allocation
The Treasury is authorized to spend $475 billion of the TARP (In July 2010, the financial regulation overhaul reduced TARP’s spending cap to $475 billion from the original $700 billion.). It has created 13 different programs, to which it has promised $458 billion.
The government committed bailout money to 946 recipients. Those recipients have received a total of $425 billion. A total of $388 billion has been returned.
The Treasury has been earning a return on most of the TARP money invested or loaned. So far, the total return is: $54.1B.
The main sources of that revenue are $25 billion through dividend or interest payments, $20 billion from sales of equity or other assets that Treasury acquired (mostly stock in Citigroup); and $9.53 billion through stock warrants which Treasury received as part of most of the investments. When companies pay back the TARP investment, the warrants are either sold back to the company or auctioned off.
When those revenues are taken into account, the government's profit totals $17 billion.
While the Treasury has paid out money to 946 recipients, only 781 of those received funds via investments meant to return money to taxpayers. The rest received subsidies through TARP’s housing programs – that money (so far totaling $13.5 billion) isn’t coming back.
Of the 781 investments made by the Treasury, 554 have resulted in a profit. 116 of the investments resulted in a loss. So far, the profits amount to $63.6 billion, while the losses amount to $17.4 billion. 111 of the investments are still outstanding.
Fannie and Freddie
The total amount invested in Fannie and Freddie so far is $187B.
The Treasury has been earning a return on its investments, which has resulted in a profit. So far the companies have paid $219B in dividends to the Treasury.
http://projects.propublica.org/bailout/
I don't know? Maybe the plaintiffs got what they wanted to get or more than they wanted rather quickly instead of having to grill him for hours. His statement about the bailout being punitive has made major headlines.
What if Paulson takes the stand for FnF? read this
Ex-Treasury Secretary Paulson says AIG bailout was punitive
1:58 p.m. EDT, October 6, 2014
WASHINGTON (Reuters) - Former Treasury Secretary Henry "Hank" Paulson told a packed courtroom on Monday that AIG shareholders were singled out for punishment as part of the U.S. government's attempt to contain the contagion of the 2008 financial crisis.
The testimony from Paulson appeared to bolster some claims contained in a lawsuit brought by former AIG Chief Executive Hank Greenberg, who contends the terms of a government loan to AIG cheated its shareholders.
"AIG, either fairly or unfairly, ... became a symbol for all that is bad on Wall Street," Paulson said as he testified about the U.S. government's bailout of the insurance giant, which began with a $85 billion loan from the New York Federal Reserve in September 2008.
Paulson, testifying in federal court in Washington, also said he supported the loan and its terms as appropriate for the circumstances.
Paulson was a chief architect of the U.S. government's response to the unprecedented global credit crisis. He has since written a book about the experience, but Monday's courtroom setting put Paulson on the hot seat in a way he has not experienced since Congress wrapped up its hearings on the subject years ago.
In the case of AIG, the Fed initially charged a high interest rate for the first loan and required a nearly 80 percent stake in the company in exchange, which Greenberg's lawyers have said was illegal.
Paulson said such terms were necessary to protect against "moral hazard," or concerns that other companies would take reckless risks under the belief that the government would bail them out with few consequences.
But in response to questions from a government lawyer, Paulson said Citigroup's shareholders were not subject to similar terms, in part because policymakers were concerned about short sellers who were exerting pressure on Citi's stock and would profit if the rescue targeted Citi's shareholders.
Paulson said he was worried the traders would take the same strategy to the next bank, a concern he said he did not have about any of AIG's peers.
Paulson took the stand Monday morning wearing a dark suit and red tie and appeared relaxed, answering questions so directly that Greenberg's lawyer, star litigator David Boies, wrapped up what he expected to be six hours of testimony within a little over one hour.
The testimony by Paulson comes in the second week of what is expected to be a six-week trial. Former Treasury Secretary Timothy Geithner and former Federal Reserve Chairman Ben Bernanke are expected to testify later this week.
Paulson, who served as President George W. Bush's Treasury secretary from 2006 to 2009, was previously the chief executive of Goldman Sachs Group Inc and now runs an institute that focuses on climate change and other issues.
The case is Starr International Co v. U.S., U.S. Court of Federal Claims, No. 11-00779
Read more: http://www.chicagotribune.com/business/sns-rt-us-aig-bailout-trial-paulson-20141006,0,5775350.story#ixzz3FOPgj6fU
Read more: http://www.chicagotribune.com/business/sns-rt-us-aig-bailout-trial-paulson-20141006,0,5775350.story#ixzz3FOP6TGBT
Were FnF also scapegoats? check this out!
Paulson: AIG Bailout Designed to Be Punishment
WASHINGTON — Oct 6, 2014, 1:51 PM ET
By JOSH BOAK AP Economics Writer
The 2008 government bailout of American International Group Inc. was specifically designed to punish the insurance giant, former Treasury Secretary Henry Paulson said in U.S. court Monday.
The $85 billion loan package extended to AIG — then reeling from the financial and housing crisis — gave the government control of 80 percent of its stock. Unlike other major financial firms rescued in the middle of the worst economic downturn in roughly 80 years, Paulson said that AIG shareholders should have faced punishment for their troubled balance sheet as part of any rescue.
Paulson's testimony came as part of a lawsuit brought by former AIG chairman and CEO Maurice Greenberg. The 89-year-old is suing the federal government for damages of roughly $40 billion, saying that it violated the Constitution's Fifth Amendment by taking control of AIG without "just compensation" in return for the shares.
Paulson's successor as Treasury secretary, Timothy Geithner, and former Fed Chairman Ben Bernanke are also scheduled to testify this week.
Federal officials didn't want troubled financial institutions to assume they could receive a bailout without any negative consequences. Otherwise, it might encourage those firms to engage in reckless behavior. This concept known as "moral hazard" applied to AIG but not other banks because of the multiple pressures that existed in the market in September and October of 2008.
At the time, financial investors known as short-sellers were betting that shares in AIG and prominent banks such as Citigroup would continue to plunge. Paulson said that his goal was to stabilize the financial system, which meant that the government offered less punishing terms to the banks being bailed out in order to limit the market freefall. But few other insurers faced the same risks as AIG, so the Federal Reserve-backed loan could punish shareholders to prevent moral hazard.
"I believe the Fed-designed AIG terms were appropriate," Paulson said in testimony at the U.S. Court of Federal Claims. "I didn't see any other insurance company that was vulnerable or like AIG."
Greenberg's lawyer, David Boies, pressed Paulson in court about whether the former Treasury secretary was overly harsh on AIG in order to quell public anger and pass the Troubled Asset Relief Program. At the time, some congressmen were reluctant to pass the $700 billion TARP, a program to buy troubled bank assets that could be viewed by critics as a giveaway to Wall Street.
Paulson said he contacted both 2008 presidential candidates — Democrat Barack Obama and Republican John McCain — and emphasized that AIG shareholders were being punished as part of the bailout.
AIG "certainly was a scapegoat for Wall Street and all the bad practices that people were angry about," Paulson said.
The government eventually provided AIG with $182 billion in loans, which have been repaid. AIG has since returned to profitability, and its stock has risen more than 45 percent over the past two years to more than $52 a share.
Since 2008, the company has sharpened its focus on its core insurance business, selling non-core units such as International Lease Finance Corp. for $7.6 billion. ILFC, now owned by Netherlands-based AerCap Holdings, leases aircraft.
http://abcnews.go.com/Business/wireStory/paulson-aig-bailout-designed-punishment-25998013
Congrats to all who saw what the potential is early and are still holding. You are not wrong until something definitive, permanent and negative transpires in congress and in court. All of this churning, manipulation, fear and negative press means nothing because we will be proven right in the long run. Knowing this and maalox and ambien help me. Still holding and holding my gut. What did Berkowitz say? If it was easy....
Private Mortgage Securitizations Have a Math Problem
by David Fiderer
OCT 6, 2014. According Treasury Secretary Jacob Lew and many other others, the moribund market for private-label residential mortgage-backed securities needs reviving. Well, nobody should not get his hopes up, for one simple reason. The math doesn’t work. It hasn’t worked for 20 years.
More precisely, the original premise of PLS has not stood the test of time. The idea behind every PLS deal is that the arranger can study historical data and thereby predict how a single static mortgage pool will perform over its lifetime. His prediction must be accurate so that all investors, in a 100% debt-financed deal, get repaid. He has a one-time-only chance to get it right. There are no do overs after the deal closes.
Before getting into the weeds, it may be useful to recap a few other reasons why expectations of a major PLS revival should be lowered. First, most PLS sectors — subprime, alt-A, option ARMs — are gone forever. They proved to be unmitigated failures, and no long-term data suggests that they are viable, absent a housing boom. Only the jumbo sector, which represented less than one-third of all PLS issued from 1995 through 2007, has ever demonstrated viability.
Second, during the next few years, the volume of mortgage originations is going to be a lot smaller than it has been recently. The mortgage business goes through boom/bust refinancing cycles, which are driven by the Fed’s interest rate policy. We are currently in the bust phase. The next boom may be far off, since a homeowner with 30-year fixed-rate loan priced below 4.25% is unlikely to refinance soon.
Third, the common assumption — that any downsizing of the government sponsored enterprises translates into a commensurate rise in PLS demand — is a leap of faith, because PLS are profoundly different from GSE mortgage securities. The differences relate to structure, not the federal government. PLS deals involve the transfer interest rate risk and credit risk to the bondholders. GSE mortgage securities transfer interest rate risk but not credit risk; those deals all benefit from corporate guarantees, which preempt investor concerns about market timing or loan quality in any given pool. Plus, the numbers are irrefutable; GSE loan performance has always been exponentially superior to that of any other segment of the market, whereas PLS loan performance has always been the worst.
PLS pioneer Lewis Ranieri identified the math problem in 1994, when he gave a lecture at Northwestern Business School. “We have damaged the basic structure of the new housing finance system,” he said, referring to PLS in particular. “We did not build the system to finance refinancing. We built the system to finance housing.” Ranieri and others did not intend to build a system to finance refinancings; but the system mutated to do precisely that. Since 2001, the volume of refinancings has always matched or exceeded that of home purchase loans.
But Ranieri’s logic makes perfect sense, when you remember every static mortgage pool has a net present value, based on total projected net interest income and total projected credit losses. In the 1980s, when Ranieri helped build the PLS market, it was possible to study trends from the past to predict the future, because rate refinancings rarely occurred.
From the dismantling of Bretton Woods in 1971 until the early 1990s, 30-year mortgage rates never went down for any extended period. (The once-in-a-lifetime exception occurred in the early 1980s, when Paul Volker ended his anti-inflation campaign and slashed the Fed funds rate from its stratospheric highs.) Before Volker imposed his inflation medicine, 30-year rates hovered at around 9%. After Volker allowed Fed funds rates to plummet, mortgage rates hovered at around 10% until mid-1990.
Then Alan Greenspan’s Fed slashed rates for an extended period. In June 1990 the fed funds rate was 8.3%; in December 1992 it was 2.9%, the lowest it had been since 1963. Mortgage rates did not fall as dramatically, but they fell a lot. The 30-year rate fell from about 10% to 7%, and then hovered around 7.5% for quite a while. For the first time, refinancings exploded. Total refinancings were $70 billion in 1990; they tripled in 1991. From 1991 through 1993, refinancings exceeded $1.5 trillion. Eventually Greenspan started raising rates again, and refinancings dropped by 60% from 1993 to 1994. This was the first in a succession of convulsive boom/bust refinancing cycles that continued during and after his tenure at the Fed.
Remember that every static mortgage pool goes through a death spiral. With each successive month, the size of the pool shrinks, so that monthly interest income continually declines. Yet the average quality of loans remaining in the pool tends to worsen. Homeowners with good credit and positive equity prepay when it suits them; whereas homeowners without equity don’t prepay. The speed of the death spiral drives the NPV. More specifically, the speed of the death spiral determines if there will be sufficient net interest income to offset all credit losses from the pool.
These massive prepayment spurts can really screw up the NPV of a static mortgage pool, especially if they occur in the early years of a transaction. After the early 1990s, it was no longer possible to predict a static pool’s prepayment rate, because no mortgage model was clairvoyant as to Alan Greenspan’s future intentions.
Still, everybody, aside from PLS bondholders, wants to encourage refinancings. Balance sheet lenders and GSEs replace old loans with new loans, which bring additional upfront fees. Everyone in the originate-to-distribute chain wants more refinancings, because they all live off of upfront fees and commissions. Alan Greenspan wanted to stimulate the economy, especially when home prices were faltering in the early 1990s.
But if these refinancing booms screwed up a mortgage pool’s NPV, why did the PLS market keep rolling along for another twelve years, with no market disruptions? There are several reasons why these issues could be swept under the rug.
Most important, the NPV volatility is concentrated in the most subordinate tranches. As you probably know, the most important thing for an investor in a PLS deal is seniority in the hierarchy of tranches. Just as the NPV of every mortgage pool is updated monthly, based on the latest loan performance data, the NPV of every tranche in every PLS deal is updated monthly. The NPV of a single mortgage pool may be volatile, but almost all that volatility is absorbed by the most subordinated tranches.
Going from the most senior tranche downward, each tranche relies on a decreasing level of overcollateralization, until you get to the very bottom tranche, the equity tranche, which benefits from no overcollateralization. The equity tranche (which is debt but collects any potential upside) relies entirely on excess spread — the difference between interest income collected from mortgages and the interest paid out to bondholders — to offset any credit risk. It also follows that, within a deal, the more subordinated the tranche, the more reliant it is on excess spread, and vice versa.
The subsequent refinancing boom, which began in 1997 and continued into 1998, did create big problems; it caused the subprime mortgage market to collapse. (For once, the boom was not triggered by Fed Policy but by fiscal policy; the Federal deficit came down so rapidly that long-term rates fell while the Fed funds rate remained stable.) In April 1997 the 30-year rate fixed rate was about 8%. By June of 1998 it was 7%, where it stayed until May 1999.
In the late 1990s, some long-forgotten subprime lenders — such as ContiFinancial, Southern Pacific — sold mortgages for PLS deals, in which they retained the equity tranches. In 1999, when faster-than-expected prepayments wiped out the NPVs of those deeply subordinated tranches, the companies’ equity was written down. Consequently, banks cut back on the credit lines used by subprime lenders to finance originations. And suddenly these subprime lenders were out of business.
Of course, these equity tranches were a small percentage of, what was then, a small niche in housing finance. And in the 1990s, the rated tranches of most subprime securitizations were guaranteed by mortgage insurance, so few investors took much of a hit.
In the late 1990s, credit losses were minimized because the economy was booming and home prices were rising everywhere. The California real estate boom, which began in 1997 and ended in 2006, skewed nationwide results. Loss severity on California subprime mortgage defaults was minimal; it fell from 5% in 2002 to 2% in 2003 and averaged 1% from 2004 through 2006. Contrast that with the subprime loss severity in Pennsylvania, which fell from 49% in 2003 to 26% in 2006. (In 2009 the average loss severity for California subprime loans was 70%. Timing is everything.) The timing of the California boom from 1997 until mid-2006 coincided with the roll out of the ratings agencies’ new mortgage models, which primarily relied on FICO scores to predict losses.
Though real estate is long-term investment, PLS can have economic lives that are very short. During the boom, most subprime PLS deals had average lives below three years. So if the excess spread earned during the few years is insufficient to cover all credit losses, the subordinated tranches will not recover principal.
We don’t know who purchased those subprime equity tranches after 2000, but we do know where most of the deeply subordinated tranches, which had investment grade credit ratings, ended up. They were stuffed into CDOs. Remember, any tranche rated below triple-A is deeply subordinated. Any non-triple-A tranche of subprime deal was subordinate to 80% of the capital structure; sub-triple-A tranche of an alt-A deal was subordinate to 90% of the capital structure; for jumbo deals it was 95%. Because these non-triple-A tranches were stuffed into CDOs at par, they rarely traded.
An NPV should foretell the future. But, given the way that most PLS are structured, years can elapse before a tranche with a lousy NPV suffers a payment default. Most PLS are structured so that no principal is due and payable for 30 years. And mortgage prepayments generally assure that monthly cash flows can cover interest paid to bondholders.
So the ratings agencies simply allowed these zombie tranches, which would never recover principal but remained current on their interest, to languish for a long time before any downgrade was announced. The ratings agencies had no incentive to antagonize their customers, the Wall Street banks that hire them to rate structured deals. Also, the ratings agencies had no incentive to invite any criticisms of their methods. And so far as we know, none of the CDO managers expressed concerns about the bond ratings.
This basic problem — wherein excess spread can be wiped out quickly so that the values of the subordinated tranches are slashed overnight — has been swept under the rug for a long time. It’s hard to see how Treasury can enact reforms that overcome this problem.
http://www.nationalmortgagenews.com/index.html
Ha, no I do not sleep too well and not too often lately. fanniesomnia.
On Tuesday, a federal judge dismissed a lawsuit from a group of Wall Street investors claiming that the government's decision to "sweep" the profits of Fannie Mae and Freddie Mac violated the rights of the companies' shareholders. As a result, all quarterly profits at Fannie and Freddie will continue to flow directly to the U.S. Treasury for the foreseeable future, pending further legal action.
That's good news for taxpayers, who have invested $187.5 billion in the mortgage companies since they were placed under government conservatorship in 2008. Not so much for the speculators who bought up Fannie and Freddie stock after the crash: shares in the companies lost more than a third of their value on Wednesday after the decision was announced.
The lawsuit will surely leave its mark on Wall Street and influence the future of Fannie and Freddie. However, when it comes to pain felt on Main Street, another far-less-publicized lawsuit will likely have a bigger impact.
Last year, a group led by the National Low-Income Housing Coalition sued Fannie's and Freddie's regulator, the Federal Housing Finance Agency, to lift the agency's suspension of mandatory funding to affordable housing programs. In a separate decision this week, a federal judge dismissed the lawsuit, citing standing and jurisdictional concerns.
At the center of the lawsuit was the National Housing Trust Fund, which was created by Congress in 2008 to support state and local efforts to build affordable rental housing and provide homeownership opportunities for low-income families. As originally envisioned, the Housing Trust Fund and another important community development program, the Capital Magnet Fund, would receive funding through a modest assessment on Fannie's and Freddie's ongoing business. FHFA suspended those obligations when Fannie and Freddie were put into conservatorship a month later, and the Housing Trust Fund has sat empty since its inception.
For the past year, the FHFA has cited the ongoing lawsuit to defend its near radio-silence on the issue. When FHFA Director Mel Watt was asked about the Housing Trust Fund at a recent event in North Carolina, he evaded the question. Notably, Mr. Watt did not mention the issue in his first major policy address earlier this year, and neither the Housing Trust Fund nor the Capital Magnet Fund was referenced in the agency's five-year strategic plan released in August. The agency did, however, include a strategic priority of supporting America's renters with "a focus on the affordable and underserved segments of the market."
As the FHFA stalls on the issue, America's renters face a growing housing insecurity crisis. According to the Harvard Joint Center for Housing Studies, more than one in four renter households pay at least half of their monthly income on housing — an unprecedented number. Many of these families are forced to make toxic choices — between paying rent or buying groceries, between keeping the lights on or buying medicine — often with severe health and other consequences. Meanwhile, due to recent budget cuts, federal funding for rental assistance programs covers only a small fraction of the families who need it.
We cannot address this crisis without additional resources. Both Fannie and Freddie have been profitable since 2012 and have returned more money to taxpayers than they initially received in the bailout. According to the National Low-Income Housing Coalition, if Fannie and Freddie had been required to fund the programs in 2012 and 2013, a total of $760 million would have gone to communities to support more affordable housing.
The FHFA can take a meaningful step toward ending housing insecurity by lifting their suspension on funding the Housing Trust Fund and the Capital Magnet Fund. Now that the lawsuit has been dismissed — and since we now know that the government's relationship with Fannie and Freddie will not be changing anytime soon — it's time for the FHFA to make good on Fannie's and Freddie's legal obligations.
http://www.americanbanker.com/bankthink/the-other-fannie-and-freddie-lawsuit-1070349-1.html
This article ties FnF to AIG thus explaining my AIG posts
Fannie-Freddie Case Shows Messy Nature of Deal-Making in a Panic
By David Zaring and Steven Davidoff Solomon
October 2, 2014 4:00 pmOctober 2, 2014 4:00 pm 2 Comments
This week has been a banner one for those who are still angry over the government’s actions in the financial crisis. The rescues of the American International Group and the mortgage giants Fannie Mae and Freddie Mac all came under a courtroom microscope.
In one Washington court, Maurice R. Greenberg, the former chief executive and major shareholder of A.I.G., is suing the United States government, contending that the tough terms imposed in return for the insurance company’s bailout were unconstitutionally austere.
In another closely watched case in a different Washington court, the shareholders of Fannie Mae and Freddie Mac, led by hedge funds Perry Capital and the Fairholme Fund, lost a similar kind of claim.
Parsing what the United States District Court did in the Fannie and Freddie litigation offers a window into the ways in which the government’s conduct during that crisis might finally be evaluated.
The government’s takeover of A.I.G. really did prove damaging for its shareholders, even as that takeover meant that the banks that did business with the firm would be paid off at 100 cents on the dollar, a rate far better than the one they would have received in bankruptcy. That doesn’t seem fair, though financial crises are not times for exquisite sensitivities to fairness.
Still, we think that the likely result of the A.I.G. lawsuit is that the government may be embarrassed to have the chaos of the financial crisis exposed by Mr. Greenberg’s lawyers at Boies, Schiller & Flexner, but the constitutional takings claim is an uphill one. When the government gives you more than $187 billion, and you accept the offer, it is hard to argue that this is a constitutional taking. This is particularly true when bankruptcy would have certainly been the alternative result.
Fannie and Freddie’s shareholders, if anything, received a deal even worse than A.I.G.’s shareholders did. The government let them survive when it bailed out the housing giants. But in 2012, when it looked like the housing market was recovering, it struck a deal with those now-government-controlled companies – seemingly a deal with itself – that paid all of Fannie and Freddie’s future profits to the Treasury Department without a cent going to shareholders.
There’s no point in owning shares of a company that will devote the rest of its revenue to someone else, and so perhaps it is unsurprising that the funds sued, claiming that the government acted illegally. But just because the government has not been fair does not mean that it has acted illegally.
Judge Royce C. Lamberth’s opinion dismissing the suit is long and complicated and deals with arcane matter like the Administrative Procedure Act, the statute that governs the procedures that federal agencies must go through when taking action, and the anti-injunction provisions in the Housing and Economic Recovery Act, the statute that gave the government the power to put Fannie and Freddie, also known as government sponsored entities, into conservatorship.
There are three main points to the decision. For one, the court held that the government’s seizure of Fannie’s and Freddie’s profits did not violate the Administrative Procedure Act’s prohibition on “arbitrary and capricious” conduct. It also found that the Housing and Economic Recovery Act barred shareholders of Fannie and Freddie from bringing breach of fiduciary duty suits against the boards of the companies and that the government’s seizure of profits was not an unconstitutional “taking.”
The Housing and Economic Recovery Act itself prohibits any court from interfering with the actions of the conservator of Fannie and Freddie. There is an exception in the statute, however, when an agency acts outside its statutory authority. The court, though, held that this exception did not apply to the prohibition on arbitrary and capricious conduct under the Administrative Procedures Act.
In other words, the Housing and Economic Recovery Act prohibited the court from scrutinizing whether the government acted in an “arbitrary and capricious” manner with respect to the government sponsored entities.
The Housing and Economic Recovery Act also prohibits any shareholder claim for breach of fiduciary duties by the Fannie and Freddie boards. In prior cases, courts have adopted an exception if there is a manifest conflict of interest that exists in the attacked board action. In this case, however, the court refused to find that such an exception existed, in effect disagreeing with other courts. Judge Lamberth added that, even assuming that this exception applied, it would not work here. The reason was that the exception applied only if “F.H.F.A. sued itself or sued another government entity on account of F.H.F.A.’s own breach.” Because the suit was against the Treasury Department, and was not brought by the Federal Housing Finance Agency, the claim failed.
Finally, on the takings claim, the court based its approach on the fact that these government sponsored entities were highly regulated. Judge Lamberth concluded this led to a deal: You get access to American consumers, with the security of American financial regulation, both of which gives you a low cost of capital, and in exchange, you must tolerate the broken china that accompanies financial sector bailouts and resolutions.
The court then concluded that because banking is heavily regulated, the regulation includes the right to seize the firm. Applying this reasoning to the government sponsored entities, the court concluded that Fannie and Freddie’s investors “possessed no cognizable property interests in the first place.” This essentially meant that investors in these banks could never have standing for a takings claim, let alone in this case.
We wrote in a law review article that we believe that the federal courts should allow the Fannie and Freddie shareholder claims to proceed on the basis that the Treasury’s actions in the 2012 sweep were arbitrary and capricious at the time under the Administrative Procedures Act.
The Housing and Economic Recovery Act’s prohibition on this review did not apply because there was a conflict of interest here in that the Federal Housing Finance Agency was controlled by the Treasury Department and both controlled the boards of Fannie and Freddie. The remedy sought by their shareholders should be only the value of the Fannie and Freddie shares at that time, essentially a few hundred million dollar and not the billions of dollars that they seek.
This court went another route.
There will be an appeal, and the United States Court of Appeals for the District of Columbia will look at these questions anew. We think that the conflicts analysis and the takings clause are liable to attack on the grounds that they are not logical. After all, the Federal Housing Finance Agency and the Treasury were essentially the same entity in 2012. Saying that investors have no constitutional protection of property in a bank investment seems to us aggressive.
And so we await the outcome of the Fannie and Freddie case, as well as the A.I.G. case.
In truth, the law doesn’t matter so much here as much as how sympathetic you are to the idea that sophisticated investors can be wronged by the government, both in the middle and in the aftermath of a bailout. Many think that the problem with the financial crisis was not that the government treated the banks too harshly, but that it was not harsh enough.
The A.I.G. and Fannie and Freddie lawsuits will appeal to those who believe the opposite.
In both cases, much of the outcome will depend on how these federal judges view the bailout, which is unknown. Again, we think our route is perhaps the best one under the law, and perhaps the appellate judges will agree.
It didn’t have to be this way. The government brought this on itself by taking an approach to the financial crisis that we have elsewhere termed regulation by deal. The government cut deals, but its quick actions didn’t allow for much foresight.
This became apparent in 2012, when Fannie and Freddie became profitable again. The government responded by recutting its deal with the two companies in its favor.
Now, the untidy nature of deal-making is being exposed after the panic when reflection comes in.
It is all a lesson for the government when the next financial crisis occurs.
David Zaring is associate professor of legal studies at the Wharton School at the University of Pennsylvania.
http://dealbook.nytimes.com/2014/10/02/fannie-freddie-case-shows-messy-nature-of-deal-making-in-a-panic/?_php=true&_type=blogs&_r=0
AIG Bailout Trial Bombshell II: Fed and Treasury Cornered AIG’s Board into Taking a Legally-Dubious Bailout
Posted on October 6, 2014 by Yves Smith
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As we said in our companion post today on the AIG bailout trial, former AIG CEO Hank Greenberg may have a case after all. Mind you, we are not fans of Greenberg. But far too much of what happened during the crisis has been swept under the rug, in the interest of preserving the officialdom-flattering story that the way the bailouts were handled was necessary, or at least reasonable, and any errors were good faith mistakes, resulting from the enormity of the deluge.
Needless to say, the picture that emerges from the Greenberg camp, as presented in the “Corrected Plaintiff’s Proposed Findings of Fact,” filed in Federal Court on August 22, is radically different. I strongly urge readers, particularly those with transaction experience, to read the document, attached at the end, in full. It makes a surprisingly credible and detailed case that AIG’s board was muscled into a rescue that was punitive, when that was neither necessary nor warranted. And the tactics used to corner the board were remarkably heavy-handed.
Note that our earlier post describes that, contra previous accounts, AIG had numerous deep-pocket suitors petitioning Treasury to buy into struggling insurer. That means that rather than having the US nationalize the insurer, it would have been viable to see if a mere bridge facility could have been taken out by a consortium of investors. If that failed, the nationalization option remained open. The failure to take that course makes the idea that the AIG bailout was intended to serve as a money laundering vehicle for wobbly banks, a theory before that sounded like a stretch, appear far more credible.
Another hard-hitting charge in the filing by Greenberg’s attorneys is that the Fed didn’t have the authority to take an equity stake in AIG, yet clearly did so before passing it to a trust, which was a clear sham. The trust has only three trustees, with no meaningful staff. Government officials operated in a very open manner in managing AIG, from installing the new CEO, a Goldman board director Ed Liddy, new board members, putting staff on site, and even meeting with ratings agencies about ratings decisions.
Now you might say that all these legal fine points were niceties. But the violations of both normal governance practices, the most important being asking the AIG board repeatedly to make decisions while withholding critical information or making actual misrepresentations, and of various laws, were significant and numerous.
Another stunning new allegation in the “Corrected Proposed Findings of Fact” document is that, in stark contrast with previous claims by the Fed, that only UBS was willing to take a haircut, it turns out the New York Fed only bothered talking to eight of the 16 counterparties (and then as we already know from the SIGTARP report on this issue, using a script that was delivered by junior staffers, as opposed to having Geithner or Paulson call and force them to take a haircut). Moreover, BlackRock, which was advising the Fed, believed that Bank of America and Goldman would be receptive to discounts.
Contrast the railroading of AIG with the kid gloves treatment of preferred parties. Recall Geithner’s sanctimonious claims about needing to respect contracts when that excuse served the Fed-Treasury combo, as the pretext for forcing discounts on the payments of credit default swaps with AIG, or for paying high wages to AIG staffers who were working on winding down the operations of AIG Financial Products, hardly as demanding a job as running an ongoing entity. It’s these repeated, public professions of the need to be scrupulous about observing proper protocols that make the AIG railroading look so striking.
Mind you, I do not buy everything this filing is selling. For instance, they argue that some of the value of AIG was shifted into two bailout-related vehicles, Maiden Lane II and III. That’s a potentially legitimate point. However, they argue for what was “taken” from Greenberg based on the eventual payout on both. The problem with that approach is ZIRP and QE were continuing subsidies to the banks, and thus to AIG. Conceptually, it’s not obvious why Greenberg should get that benefit, since AIG did have to be salvaged in some manner in September 2008, and a rescue then (say with considerable investment by a foreign consortium) would mean valuations on the toxic CDOs would need to be taken around that time.
Greenberg’s lawyers also base that valuation argument on work done by BlackRock, which as the asset manager for the Fed, could be argued to be not predisposed to AIG’s side. However, BlackRock could be argued to be expected, to the extent reasonable, to make the Maiden Lane vehicles look like good investments, and hence have an optimistic bias to their valuations. We were doing valuation work on the Maiden Lane vehicles, and based on the information we had, the initial valuations looked to be inflated. But the flip side is that the Maiden Lane II and III counterparties, as part of the deal, got a very valuable release from liability, and the Maiden Lane vehicles (and even more so, AIG) was never paid for that bennie.
There is a lot of salacious material in the document. For your reading pleasure, I’ve extracted some key sections below:
Fed and Treasury Muscling the AIG Board
CEO Robert Willumstad, who desperately needed some sort of bridge loan, was given a term sheet to review on September 16. It was a “drop dead” offer. Take a credit facility for up to $85 billion, with an interest rate of 650 basis points over Libor, and give up 79.9% of the company, which the AIG side understood to be in the form of warrants. He was also told he had to get board approval in two hours. The document was amateurish:
(a) At around 3 or 3:30 pm on September 16, 2008, AIG’s outside counsel showed Willumstad a term sheet that was “maybe two pages” and that was “mostly bullet points. It wasn’t a professional looking document” but rather looked like it “may have been put together by” Willumstad’s “grandchildren” who are “ten and twelve” (Willumstad (Oct. 15, 2013) Dep. 269:22-271:8). (numbered text page 24, PDF page 28)
Then get a load of this (emphasis original):
12.1 The AIG Board was never presented with the version of the term sheet Defendant claims was executed.
12.1.1 Willumstad was the only member of the AIG Board of Directors that 12.1.1saw a term sheet on September 16, 2008.
12.1.2.The term sheet Willumstad saw on September 16 has not been produced in this litigation.….
(d) After the AIG Board of Directors meeting on September 16, 2008, Willumstad signed a single signature page that had nothing attached (JX 76 at 1-2), a copy of which was faxed to Defendant at 8:44 pm (PTX 94 at 1-2) and subsequently appended to a copy of a term sheet Willumstad had not seen.(numbered text page 14, PDF page 28)
Yves here. The board let Willumstad sign what amounted to a blank check to the government? And the government, in a trial, is refusing to turn over the term sheet it provided to Willumstad? What kind of nonsense is this?
This deal was only a short term secured credit facility, to be taken out by a more buttoned-up credit agreement. To the extent there were actual agreed terms here, principal, interest and fees were due either on the demand of the NY Fed or September 23. Even though the board was in theory still in charge, Paulson unilaterally fired Willumstad on September 16 and along with the New York Fed, replaced him with Ed Liddy as chairman and CEO. It also started moving staff into AIG. Note the Fed Board of Governors has not authorized the New York Fed to take this step.
There was already a disconnect between the AIG and the government as to what this first deal was about. AIG issued press releases and an 8-K filing about the secured credit facility and described the 79.9% interest in the form of warrants. The Feds demanded that AIG issue a corrected 8-K and describe the equity position in unusually vague terms:
The summary of terms also provides for a 79.9% equity interest in AIG. The corporate approvals and formalities necessary to create this equity interest will depend upon its form.
When the board met the following weekend to approve the credit facility, much to its surprise, the Treasury and Fed presented terms that were substantially worse, and board had already regarded the initial deal as barely acceptable (emphasis original):
14.4 Even at the September 21 Board meeting, the AIG Board was not given a copy of the draft credit agreement…
15.0 THE TERMS OF THE CREDIT AGREEMENT WERE MATERIALLY WORSE FOR AIG SHAREHOLDERS THAN THE TERMS DEFENDANT HAD OFFERED, AND WHICH THE FEDERAL RESERVE BOARD OF GOVERNORS HAD APPROVED, ON SEPTEMBER 16.
15.1 The form of equity was material to AIG…
15.2 Defendant changed the form of equity from non-voting warrants to voting convertible preferred stock in order to obtain immediate control of AIG.
(a) “FRBNY considered whether it should seek equity in the form of warrants, but concluded that, among other shortcomings, this approach would not be consistent with all of its objectives because the warrants would not carry voting rights until exercised” (Def. Resp. to Pl. 2nd Interrogatories No. 2)…
15.4 Defendant changed the form of equity from non-voting warrants to voting convertible preferred stock to avoid the shareholder vote that would be required to issue warrants…
16.0 THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE NEVER APPROVED THE CREDIT AGREEMENT NOR THE CHANGES MADE TO THE TERMS OF THE $85 BILLION 13(3) LOAN TO AIG AS APPROVED BY THE BOARD OF GOVERNORS ON SEPTEMBER 16.. (numbered text pages 31-36, PDF pages 35-40
I don’t want to bog less technically oriented readers in details, but a major thread in the case was the machinations the Fed and Treasury went through to obtain a voting interest while circumventing shareholder approval. Among other things, that meant requiring AIG, which they effectively controlled as of September 16, to violate New York stock exchange rules.
Here is the hijacking section (emphasis original):
17.0 ON SEPTEMBER 21, 2008, DEFENDANT TOLD AIG’S OFFICERS AND DIRECTORS THAT IF THEY DID NOT APPROVE THE CREDIT AGREEMENT AS PROPOSED BY DEFENDANT, INCLUDING WITH THE CHANGES DEFENDANT HAD UNILATERALLY MADE, DEFENDANT WOULD CALL ITS SECURED DEMAND NOTES AND AIG WOULD BE REQUIRED TO FILE FOR BANKRUPTCY..
17.2 At the September 21, 2008 meeting, Liddy told the Board: “the Corporation will be required by the Bank and the Treasury Department to finalize the documentation and sign the Credit Agreement before the opening of the market the following day” (JX 103 at 2)…
17.4 Defendant threatened to cut off funding for AIG by calling its secured demand notes if the AIG Board did not approve the Credit Agreement as drafted by Defendant…
18.0 FACED WITH DEFENDANT’S NON-NEGOTIABLE DEMANDS, ITS THREAT TO CALL ITS SECURED DEMAND NOTES, AND THE OPINION OF AIG COUNSEL THAT A DECISION TO FILE FOR BANKRUPTCY WOULD NO LONGER BE PROTECTED BY THE BUSINESS JUDGMENT RULE, AIG HAD NO CHOICE BUT TO ACCEPT DEFENDANT’S LOAN ON DEFENDANT’S TERMS.
18.1 The AIG Board of Directors’ outside counsel, Rodgin Cohen of Sullivan & Cromwell LLP, advised the Board during the September 21, 2008 meeting that “bankruptcy was a considerably worse alternative now than it was previously,” (JX 103 at 6), and that “if the Board accepted the Bank transaction, the Board would have properly exercised its business judgment,” but that “if the Board chose to file for bankruptcy, he was not prepared to render a similar opinion to the Board” (JX 103 at 5-6). (See also Bollenbach (Dec. 4, 2013) Dep. 165:6-25.)
18.1. By contrast, during the September 16, 2008 AIG Board meeting, Cohen had advised the Board that it “could accept either option” of accepting the proposed credit facility or filing for bankruptcy “if the Board believed in good faith that that option was in the best interests of the constituencies to whom the Board now owes its duties” (JX 74 at 5).
AIG’s counsel, bank uber-lawyer Rodgin Cohen, has long been one of Goldman’s most important advisors, back to the day when I was an associate at Goldman. For instance, he represented Goldman on Sumitomo Bank’s acquisition of a special limited partnership interest in Goldman in 1986. Query how independent his advice to AIG could have been.
These corporate governance issues are over my pay grade, but the Treasury and Fed held a gun to the AIG board’s head on September 16 and September 21, in both cases leaving it with the option of only a bankruptcy filing. Cohen was willing to given board members an opinion that would have covered them in the unlikely event they had chosen to defy the government bear hug and file for bankruptcy on the 16th. He wasn’t on the 21st. What was different in the two fact sets to lead to a different conclusion?
The Fed and Treasury Allowed Non-Systemically Important Firms to Become Bank Holding Companies
The “Proposed Findings of Fact” document points out that GE, General Motors, and American Express all were permitted to take banking units they owned and turn them into bank holding companies in order to obtain access to bailout funds. Investment banks Goldman and Morgan Stanley were also allowed to form bank holding companies to facilitate the Fed support. Rodgin Cohen had asked the Fed if AIG could turn its thrift bank into a bank so as to also become a bank and get access to Fed lifelines. The answer was no.
And get a load of this:
As I said, there is more juicy material here. I strongly urge readers to dig in. I know this is only one side of a complicated picture. But given how much specific detail is marshaled in this AIG bailout trial filing, it is going to be interesting to see how the Paulson, Geithner and Bernanke justify the actions they took. Greenberg has always been seen as unlikely to win this case, but the government might find a victory to be more costly than it anticipated.
http://www.nakedcapitalism.com/2014/10/aig-bailout-trial-bombshell-ii-fed-treasury-cornered-board-taking-legally-dubious-bailout.html
AIG Bailout Trial Bombshell I: Paulson Rejected Chinese Offer to Invest “More Than the Total Amount of Money Required”
AIG Bailout Trial Bombshell I: Paulson Rejected Chinese Offer to Invest “More Than the Total Amount of Money Required”
Posted on October 6, 2014 by Yves Smith
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Hank Greenberg may have a case after all.
The former CEO of AIG, and major pre-bailout shareholder through the AIG executive enrichment vehicle, C.V. Starr, is hardly a sympathetic figure. The idea of a billionaire suing the government for saving the company that he formerly led from bankruptcy hardly seems like a winning cause.
But in this beauty contest between Cinderella’s ugly sisters, in this case Greenberg versus the defendants, which is nominally the US government but in a political sense is the team that led the AIG bailout, Hank Paulson, Timothy Geithner, Ben Bernanke, and their chief lieutenants, Greenberg may well come out looking better.
We base our view on a reading of the “Corrected Plaintiff’s Proposed Findings of Fact,” filed in Federal Court on August 22. We attach this document at the end of this post. Note that this record includes extracts from the depositions of Paulson, Geithner, and Bernanke, which were sealed by the court, meaning it contains information otherwise not available to the public. As we will also show in the second post in this series, even this document has a section which has been redacted.
It is important to keep in mind that this is the Hank Greenberg version of the story, as presented by his attorneys, Boies, Schiller & Flexner, and Skadden Arps. But the flip side is that the narrative on what happened when AIG was about to go under was written by the victors, above all, the Paulson-Geithner-Bernaked troika, repeatedly lauded in the media for saving the financial system. Even now, with the economy languishing with high unemployment (when discouraged workers are included in the tally) and low trendline growth, the official narrative, that saving the system was paramount, and certain casualties were unfortunate but necessary, is far more widely accepted than it should be. It’s clear that the rescues were designed to favor the banks, and pretty much everyone else was sacrificed for their benefit. Nevertheless, it’s an odd spectacle to see a self-styled and perhaps actual victim, a grasping, tenacious billionaire, unearth new information about whose interests were really served by how the bailouts were structured and carried out.
The authorized version of what happened in the rescues is Andrew Ross Sorkin’s Too Big to Fail. Much of his book focuses on the Lehman unravelling, with Dick Fuld as a hyperaggressive CEO who blew some possible rescues because he refused to believe that Lehman would not be bailed out and thus overplayed his hand in negotiations with his best shot at deliverance, the Korean Development Bank. Sorkin gives the AIG rescue short shrift, but makes sure to present AIG CEO Robert Willumstad as an idiot who doesn’t have a handle on his company’s yawning black hole. By contrast, the various officials and the bankers rounded up to work on the financial salvage operations are depicted sympathetically. Pace Sorkin, if they are guilty of anything, it’s of well meaning errors in judgment.
The Starr filing gives quite another picture. It argues that AIG was forced to take a bailout it didn’t need, that all that was required was a bridge loan until it could obtain private financing. That may sound like a howler. AIG was teetering on the verge of failure and needed to get a $14 billion bridge loan on September 16 (a Tuesday, the day after the Lehman bankruptcy) that in a few days rose to $37 billion simply to carry it through the weekend when the terms of the credit facility were finalized.
The Too Big to Fail account is consistent with the “are you kidding?” reading. It has Jamie Dimon giving the orders to his world-leading syndicated lending team, led by industry legend Jimmy Lee, to wheel into action to find big bucks for AIG. Dimon also tells his stunned subordinate Doug Braunstein that Goldman is co-leading the syndication. Braunstein sputters that Goldman as major AIG counterparty has a huge conflict. Dimon tells him to shut up.
The Too Big to Fail account has some chaotic meetings, with Goldman clearly too preoccupied with its payout on an AIG rescue and too confident that its credit default swaps on AIG are money good. But like most other accounts to date, it makes it sound as if rounding up enough private capital for AIG was a non-starter. The punch line:
Lee’s brain was starting to do the math.
“Who’s going to buy this shit?” he asked out loud to no on in particular.
Contrast that picture of the AIG bailout with the Starr account (emphasis original):
7.6 Defendant directly discouraged sovereign wealth funds from providing liquidity to AIG.
(a) Sovereign wealth funds, including the Government of Singapore Investment Corporation (GIC) and the Chinese Investment Corporation (CIC) expressed interest in investing in AIG (Studzinski Dep. 39:4-40:18, 133:11-19).
(b) Defendant discouraged the CIC and representatives of the Chinese Government from assisting AIG. At 12:25 p.m. on September 16, 2008, Taiya Smith, Paulson’s deputy chief of staff and executive secretary, informed Paulson’s chief of staff and Treasury Under Secretary for International Affairs David McCormick that the CIC was “prepared to make a big investment in AIG, but would need Hank to call [Chinese Vice Premier] Wang Qishan” (PTX 89 at 1; see also PTX 423 at 15-18). The Chinese “were actually willing to put up a little bit more than the total amount of money required for AIG” (PTX 423 at 16).
(c) On September 16, 2008, McCormick spoke to Paulson about the Chinese interest in investing AIG (PTX 423 at 16-17). McCormick then told Smith that Treasury “did not want the Chinese coming in at this point in time on AIG” (PTX 423 at 17).
(d) Later that day, Smith met with Chinese Government officials in California during Joint Commission on Commerce and Trade in Yorba Linda, California (PTX 423 at 16). During that meeting, “all [the Chinese officials] wanted to talk about was AIG” (PTX 423 at 17). Smith spent one or two hours explaining what was happening with AIG (PTX 423 at 18). She conveyed the message that Treasury did not want the Chinese to invest in AIG (PTX 423 at 17).
(e) On September 17, 2008, United States Senator Hillary Clinton called Paulson “on behalf of Mickey Kantor, who had served as Commerce secretary in the Clinton administration and now represented a group of Middle Eastern investors. These investors, Hillary said, wanted to buy AIG. ‘Maybe the government doesn’t have to do anything,’ she said” (PTX 706 at 279). Paulson told Senator Clinton, “this was impossible unless the investors had a big balance sheet and the wherewithal to guarantee all of AIG’s liabilities” (PTX 706 at 279). (numbered text page 17, PDF page 21)
The fact that the Singapore and Chinese sovereign wealth funds both were willing to invest in AIG, and that a separate group of Middle Eastern investors was also pressing to buy in, strongly undercuts the official story that the only way out for AIG was into the Fed’s arms. Yes, we don’t know exactly how much they were willing to put in and whether that would have been enough to make up the $85 billion size of the initial credit line.
But the Chinese statement was a clear general indication that “we’re willing and able to go big”. And it turns out big was pretty big:
(a) On September 26, 2008, Treasury contractor Dan Jester received a copy of an email sent by Blackstone’s John Studzinski to Liddy and AIG executive Brian Schreiber stating that “China. Inc this morning is interested in buying: AIA, ALICO, ILFC and certain Real Estate. They are talking about writing a check of about $50 billion.” Studzinski also
Case 1:11-cv-00779-TCW Document 281-1 Filed 08/22/14 Page 66 of 99
wrote that “We need to have Paulson call Vice Premier Wang Qishan. The Chinese will then move ahead quickly” (PTX 253 at 1-2). (numbered text pages 62-63., PDF pages 66-67)
Now of course, one can argue the Chinese were trying to cherry-pick the best assets, rather than invest in AIG overall. Nevertheless, the Chinese bid should have been treated as an initial offer. And that’s before you factor in what Treasury knew and the Chinese didn’t: that other heavyweight foreign investors were also eager for the chance to buy into AIG at what they thought was a distressed price.
Now one can argue there were reasons to turn down these offers. Having the Chinese, or consortium dominated by foreigners, could prove to be ugly. The US, after all, had just put Fannie and Freddie in conservatorship in large measure to reassure the Chinese and Japanese, who were large investors in Freddie and Fannie guaranteed paper, that they would not suffer losses. What if the Chinese government rescued AIG and the black hole turned out to be bigger than anyone though it was?
A colleague, who joined AIG right before Greenberg was forced out as the executive in charge of a $100 billion operation in Asia, told me that the entire company had revolved around Greenberg personally, including not just decision-making, but knowledge of the financials. He gave the strong impression that AIG had seriously deficient controls on multiple levels: “It’s as if we are in a car that is moving forward even though the axles have been pulled out. We are waiting for the wheels to fall off.”
There is also the not-trivial issue that AIG is widely believed to provide legitimate-looking jobs to CIA assets all over the world. Would letting foreigners obtain control put that sort of information at risk?
However, concerns about foreign ownership, or undue risk of the Chinese later getting a case of buyer’s regret could then lead to more international tension, could have been handled by having a broad consortium of foreign buyers plus US investors. And having brand-name offshore institutions already in for a big portion of a total fundraising would make rounding up the US component vastly easier.
To put it simply: this much foreign interest, from so many sources, BEFORE Jimmy Lee had started making calls (certainly the Chinese and Singapore offers came in before that; the Middle Eastern offers came through Kantor, and thus did not result from the JP Morgan/Goldman fundraising effort) suggests this deal could have gotten done. Confirmation comes from this testimony:
(d) KKR’s Derrick Maughan provided sworn testimony that if “AIG, the company, or the Fed as lender of last resort, had wished they could have stabilized the company through Government invention support [sic], and then introduced private capital” (Maughan Dep. 73:4-18).
(e) In contrast to Defendant’s refusal to facilitate AIG’s attempts to raise liquidity from the private sector, Defendant provided assistance under section 13(3) to “facilitate the merger” between JP Morgan and Bear Stearns in March 2008 (PTX 709 at 156). (numbered text page 16, PDF page 20)
Now of course, as many readers have surmised, there are other explanations that seem more plausible for Paulson’s quick rebuffs, namely, that the Fed and Treasury had a a rough idea of an AIG bailout plan in mind and were past the point where they were willing to consider alternatives. Or alternatively, that there were key but unstated design parameters in an AIG rescue, and letting foreign investors in would have interfered with them.
AIG’s contention is that the driver of how its rescue was done was to force as many RMBS and CDO credit losses on AIG, so as to reduce the amount of support that would have to go directly to banks. In other words, it was to facilitate the bailout of the investment banks and banks that were perceived to be essential due to operating the payments system and large domestic and international over-the-counter debt markets. AIG could be handled more roughly because it was not a critical part of the financial plumbing and also had never done much to curry political favor. By contrast, if foreign investors were part of the rescue team, they would almost certainly have insisted on haircuts on the AIG credit default swaps, a large mechanism for laundering bailout dollars through AIG to banks and former investment banks like Goldman and Morgan Stanley.
Our second post in the series looks at the Starr allegations of how the AIG bailout was handled. As hard as you may find it to believe, the filing marshals strong evidence that AIG was stolen from shareholders. It’s going to be interesting to see how the government responds to this account, and in particular, Goldman’s troublingly central role.
http://www.nakedcapitalism.com/2014/10/aig-bailout-trial-bombshell-paulson-rejected-chinese-offer.html
Tough grilling over AIG bailout
http://www.nbcnews.com/watch/cnbc/tough-grilling-over-aig-bailout-338252867949
Paulson forced to testify: link to Bloomberg
http://www.businessweek.com/videos/2014-10-06/aig-lawsuit-makes-hank-paulson-defend-crisis-decisions
Maloni:Lamberth Casts First Stone;Judge Lamberth Says What???
So, Judge Royce Lamberth dismissed a major suit against the Treasury and FHFA, when he opined the Congress gave the two total authority to do whatever they wanted to/with Fannie and Freddie.
However, the challenges don’t stop with Lamberth.
The Perry Capital plaintiffs (Ted Olsen from Gibson Dunn) already have announced plans to appeal and other “takings” lawsuits—which are a major part of the public spectacle about the GSEs—continue before Judge Margaret Sweeney, albeit slowly.
For the stakeholders who want F&F to exist and function in a future US mortgage market, this setback isn’t desirable but it definitely is not dispositive and doesn’t much change the issues facing the Congress, although you can bet that the Administration/Department of Justice will try and use Lamberth’s opinion to stop or slow down the other cases it faces, as well as flog the finding on the Hill.
Appeal in Works
I’ve talked to several lawyers who believe Lamberth’s decision is ripe for the appeal and won’t survive a DC Court of Appeals review.
(An appeals court plaintiffs’ victory would send the case back to Lamberth, asking him to review his specific legal errors.)
One point hit by most of those is how can Lamberth argue that the underlying legislation—The Housing and Economic Recovery Act of 2008 (HERA), meant to conserve and revive the two entities for full functioning--is served when Treasury takes every penny F&F earn, not allowing them any revenue for recapitalization?
Using a tortured construction, Lamberth failed to measure the Treasury and FHFA performance against the existing “arbitrary and capricious” standards, suggesting that FHFA’s protection against the same magically covers the Treasury as well, a fact which appellant judges might see as a major reach and a Lamberth error. (See NYT link, Fiderer segment, and Kim material.)
As a non-lawyer, I thought Lamberth’s opinion was pretty stark and simplistic, as if he took the easy way out and chose not to engage the implications of the Treasury actions (with the FHFA—the statutory conservator--playing “Tonto the enabler” to the Treasury’s “Lone Ranger”).
I can’t turn the chicken crap Lamberth decision into chicken salad, but most people assumed and still assume that this matter ends up before the Supreme Court (which is why you hire David Boies and Ted Olsen) and a final decision will take a long time.
Preferred and Common Fall, but Why?
F&F common and preferred stock, at one point, lost more than 50% of their value this past week, after losing a lot previously (causing me to wonder if the Lamberth decision somehow leaked out several days before it was announced?).
But—given the Congress’ difficulty restructuring them legislatively and F&F’s solid business in the most recent quarter—to some those current prices will seem like a buying opportunity at a low basis.
I’ve said that F&F preferred and common trade on whim, opinion, hopes and fears of judicial and legislative action, not necessarily the fundamentals which drive other stocks (despite the fact that F&F business volumes—including recent 3Q MBS levels--and low loss projections are pregnant with earnings promise).
As long as those judicial and congressional options/opportunities are alive, you’ll have myriad sellers and buyers.
Fiderer on the Lamberth Decision
(I asked David Fiderer one of our favorite writer/researchers, who also is a lawyer, to comment on Judge Lamberth’s ruling.)
Judge Lamberth says plaintiffs ignore the plain meaning of the statutes, which, according to his reading, virtually exempts FHFA’s actions from judicial review, (except for any violation of the Constitution). To arrive at his conclusion, he ignores the plain language of the statute, and imagines that FHFA has certain rights that are specifically proscribed.
To me Lamberth’s most revealing sentence was buried in footnote 20:
“There surely can be a fluid progression from conservatorship to receivership without violating HERA, and that progression could very well involve a conservator that acknowledges an ultimate goal of liquidation. FHFA can lawfully take steps to maintain operational soundness and solvency, conserving the assets of the GSEs, until it decides that the time is right for liquidation. See 12 U.S.C. § 4617(b)(2)(D) (“[p]owers as conservator””
That fluid progression toward an ultimate goal of liquidation appears to be a figment of Lamberth’s fertile imagination, which he uses to rationalize FHFA's move to drain all retained earnings from the companies. Look at the text:
(D) Powers as conservator
The Agency may, as conservator, take such action as may be—
(i) necessary to put the regulated entity in a sound and solvent condition; and
(ii) Appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.
So long as FHFA is a conservator, it is not allowed to take actions that are antithetical to that role. Nothing in the text suggests that FHFA can take actions to facilitate liquidating the company before FHFA has been formally designated as a receiver. Again, this is clear from the language of the statute:
(E) Additional powers as receiver
In any case in which the Agency is acting as receiver, the Agency shall place the regulated entity in liquidation and proceed to realize upon the assets of the regulated entity in such manner as the Agency deems appropriate, including through the sale of assets, the transfer of assets to a limited-life regulated entity established under subsection (i), or the exercise of any other rights or privileges granted to the Agency under this paragraph.
The reason why the text says what it says should be pretty obvious. A conservatorship devolves into a receivership for a liquidation only after a formal assessment has been made that the conservatorship cannot achieve its goal, which is restoration of the GSEs’ soundness and solvency. Until that point, FHFA has no right to compromise the GSEs’ soundness and solvency in pursuit of a liquidation. In fact, under the statute, such action would be illegal. I cannot imagine anyone with a background in finance, business or law who might think otherwise.
(Note: Fiderer told me the other day that he now is available to work—as a “hired gun”-- on the banking and GSE issues he’s studied and written about for years. Email me if you want to reach out to DF, an outstanding financial intellect and broadsider.)
Michael Kim Reviews Lamberth’s Ruling
The very capable Michael Kim of CRT Capital LLC did a client summary and review of the Lamberth decision, putting it in the context of other “Third Amendment” lawsuits.
Not being able to link it (because I lack the technical skills), I am going to refer readers to Michael’s work with which, not surprisingly, I agree. I believe that F&F advocates, as well as those supporting the lawsuits, will find MK’s stuff very useful and informative.
As we have done in the past when I don’t have the capacity to provide Michael’s material, directly, I believe Mike will provide it to those who seek a copy; Contact him at MKim@crtllc.com.
Headline: Kim thinks there are weaknesses in the Lamberth finding which the appeal will exploit.
What Stuff Might Happen in Congress?
If Lamberth had ruled for the plaintiffs, we might feel better, but it wouldn’t end the Hill’s self-created “Fannie/Freddie dilemma” saga.
Let’s look at Congress, again.
First off, I am sticking with my prediction that nothing definitive occurs legislatively with F&F until at least 2017 when we have a new President.
Fears
Airing the anxieties, let’s examine worst case.
Assume after November, the House GOP majority grows and the Senate, barely, flips to the R’s and Dick Shelby (R-Ala.) becomes the new Senate Banking Committee (SBC) Chairman in 2015.
A GSE supporter’s most common “legislative” worry, next year, is Shelby moves some version of the CWJC (CorkerWarnerJohnsonCrapo) bill, renamed “the Shelby-(add name).” in honor of the most senior SBC D who signs on, and convinces HBC Chairman Jeb Hensarling (R-Tex.) to accept the Senate bill in conference, once Hensarling gets his own legislation through the House and Shelby successfully gets his bill through the Senate.
As reminder, the Hensarling bill removes the federal government entirely from the mortgage market, leaving it all to “the private sector” which means the large banks. The CWJC nee Shelby bill phases out F&F, keeps the feds in, creates a new government agency to insure banks against securities losses, and puts everything, including the remnants of F&F on budget, to the tune of $5.3 Trillion in further red ink.
I know I always say you never should say “never,” but this scenario ain’t going to happen, boys and girls. Never!
House and Even an R Senate Won’t Agree on CWJC
The gulf between the leading House and Senate mortgage reform legislative proposals is much too wide.
The House R’s won’t sign up for anything that keeps the federal government in the mortgage market as significantly as CWJC proposed and also keeps Fannie and Freddie alive for an indeterminate number of years (from five to fifteen),
I think Dick Shelby is too pragmatic to rush a bill through the Senate, into conference and then abandon it to accept just what the other chamber approved.
Mainly, because a GOP-run Senate would not have the 60 votes necessary to override a certain Obama veto of Hensarling’s remove-the-government- from housing finance, at least not without the R’s tacitly kissing off the 2016 presidential and congressional elections, plus R control of the Senate and maybe the House, too.
I’d love to see Karl Rove proclaiming, “Hey people, support the GOP candidates in 2015-2016 because we’ve succeeded in taking away your low cost, long term fixed rate mortgages.”
Flip side: With as many House R’s who claim they dislike Fannie and Freddie, I don’t think the House GOP Caucus will go for any plan which keeps a heavy federal presence in the mortgage market—even in a vehicle phasing out F&F over some period--just to have some other federal government agency signing Uncle Sam’s name to mortgage guaranties.
The nonpartisan truth, which the GOP leadership should know, is that our mortgage markets are too critical to screw up; they still have to function, can’t take a hiatus, and everyone—no matter their political persuasion—wants mortgages available at reasonable rates and the accompanying robust economy, jobs, disposable income, business activity, stability, tax revenue, etc. etc.
I’m From Missouri, Show Me!
For me, the bottom line—until I see something dramatically different—is the Senate, even under GOP control, would want the federal government present in the mortgage world to insure 15-30 year FRM, whether that means F&F or some red, white, and blue substitute.
Then you have the House’s (misguided) will and votes wanting Uncle Sam out of markets as soon as possible.
That standoff stays until a new President possibly fashions a compromise in 2017, which means most interim action will be regulatory.
http://malonigse.blogspot.com/
some of you may be able to help here
Update tonight/ Blog issues.
Sunday Oct 2014
Posted by timhoward717 in Fannie Mae Freddie Mac
We are in the process of trying to pare down and get tonights post into a cohesive, understandable form. In the light of the recent events and new information, I feel this is a critical post.As of right now it is rather large. I also want to address some general blog concerns now as not to distract from tonight’s post. The comments section of the blog has proven to be more complex than we imagined. We have received many emails concerning people who have been having problems getting comments published. The amount of spam that is sent into WordPress.com blogs is astounding. The spam guards do a great job of filtering most out but in the process they catch some comments that are not spam. We also screen the comments to remove those that are designed for the sole purpose of instilling irrational fear in our readers or contain ideas that are either false or very misleading. I must say that the comments section at times can be a part time job in and of itself and has been being conducted by assistants who are working on behalf of our blog. If you have been having a hard time getting comments approved, please email us, and we can address it. As usual we do not allow comments that contain senseless political bashing. If you are unsure what is appropriate simply read the comments and you will see that we like to have an informed civil discussion, sharing and discussing pertinent ideas. We are still in the process of moving the blog off wordpress.com so that we will have much more freedom to create a far better discussion forum. If anyone has any experience with this please let us know. With that said, I look forward to later tonight when I will be sharing what I feel are some very relevant ideas of our own. Keep the faith!
http://timhoward717.com/2014/10/05/update-tonight-blog-issues/
Taxpayers, Freddie Mac and Fannie Mae winners in the long runTaxpayers, Freddie Mac and Fannie Mae winners in the long run Jennifer Alvarezjennifera651@gmail.com06 October 2014, 13:18See other articles of same Writer! 25.09.2014 - Action of the US President against ‘inversions’ of corporate tax is only a quick-fix Share Fannie Mae and Freddie Mac, the leading names in the housing finance sector are set to continue in institutional oblivion (and under the rule of the Federal Housing Finance Agency or FHFA) in anticipation of an upcoming decision by Congress. The companies that went bust six years ago are waiting for Congress’ decision to replace the existing two housing finance entities with a whole new setup. Though the ensuing insecurity was bad for the entire housing sector, the situation could have been far worse in that hedge funds management could have taken advantage of the situation and tried to convince a Federal Judge to handover the once-again profitable mortgage entities over to them.
Taxpayers, Freddie Mac and Fannie Mae winners in the long run
The Ruling by the Washington court
The recent ruling by Judge Lamberth prevented such an outcome from becoming a reality. On Tuesday, the Washington based US District Court rejected the lawsuit filed by a group of private investors. These private investors had been trying very hard to translate their outstanding minority pledges in the two companies into a billion dollar one-off profit. They tried to remodel the bailout of Fannie Mae and Freddie Mac – which was one of the many governmental measures responsible for saving American free market trade and private enterprise - as a significant attack on their rights to property.
Accordingly, this group of Wall Street plungers put up the theory that their stock values had been diminished by the 2012 agreement between FHFA and the country’s Treasury Department. The agreement promises all future incomes of the two entities into the hands of the government instead of private investors and hedge funds. At the same time, it is a known fact that many of these funds had bought shares of the companies at extremely low prices during the post-bailout sale.
Judge rules in favor of the Treasury and FHFA
In the fifty-two page long judgment by the US District Judge, the Judge not only dismissed the claim of the hedge funds and private investors that various Federal departments had exceeded their constitutional authority, but also provided a close interpretation of the 2008 law. Accordingly, the 2008 law not only grants complete rights to the Treasury and Federal regulators over the two housing giants and their revenue streams but also expressly abnegates from the courts of the country practically any authority to review the actions of the said agencies. Likewise, the Judge, in his observation has made known that in reality the plaintiffs were unhappy with the measures taken by the two agencies in saving the two institutions from an impending collapse, which would have triggered a complete panic.
The judge’s ruling does not bring the whole housing finance saga to an end, because the plaintiffs in this case are already planning to appeal this decision, with many similar cases still pending in other parts of the country. It is the duty of Congress now to pass a stable and permanent solution to the problem so that the country’s stultified housing finance setup can be revitalized once again.
http://www.dailynewsen.com/taxpayers-freddie-mac-and-fannie-mae-winners-in-the-long-run-article,28.html
Fannie Mae Should Be Recognized As A Mortgage Utility: Federal Financial Analytics
by Michael IdeOctober 06, 2014, 9:16 am
FedFin managing partner Karen Shaw Petrou argues that the government should acknowledge that the GSEs are privatized mortgage utilities and start to manage them accordingly
When Judge Royce Lamberth sent Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders a major setback last week, many of them responded by pointing out the other legal options still available (appeals, and a host of other cases that don’t rely on the Administrative Procedures Act). But they also returned to one of the core arguments for investing in Fannie Mae and Freddie Mac in the first place: the GSEs are essential to maintaining the type of housing market that Americans are used to with affordable 30-year mortgages.
“My solution: recognize what the GSEs are now – mortgage utilities – define the scope of their future operations as such, and move on to a new mortgage-finance system in which government sponsorship is explicit, but limited,” writes Federal Financial Analytics, Inc co-founder and managing partner Karen Shaw Petrou.
Petrou doesn’t see an alternative to Fannie Mae and Freddie Mac
Petrou takes it for granted that the GSEs have been de facto nationalized at this point and that attempts to end the conservatorship are ill-fated, though that doesn’t mean shareholders won’t get some sort of compensation. The real issue for her is that there doesn’t seem to be any other plausible replacement for the GSEs.
She isn’t enthusiastic about either Representative Jeb Hensarling’s free market purist approach (abandon the GSEs, encourage private label MBS) or Crapo-Johnson’s proposal to create a new federal agency to manage the secondary mortgage market, but she doesn’t think either of them has a chance of passing into law anyways. The Treasury has a plan to standardize private label MBS so that they can trade more easily and transparently in the OTC market, but without a government guarantee (implicit or explicit) it’s hard to see how this would matter. It’s telling that private label MBS have all but disappeared since the financial crisis, while Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and Ginnie Mae issuances continue to be oversubscribed.
Common securitization platform is a first step
“FHFA has a lot of authority to redesign the GSEs – indeed, it’s doing so with the common securitization platform,” writes Petro. “Now, it must also try its hand at creating a mortgage guarantee utility.”
According to Petrou, acknowledging that the GSEs have actually been nationalized would allow the Treasury and the FHFA to end the ‘life-support’ model that is keeping the GSEs in such a precarious state. FHFA chief Mel Watt is already planning for the future; clarifying what exactly he’s supposed to achieve would go a long way to ending the uncertainty surrounding the secondary mortgage market.
http://www.valuewalk.com/2014/10/should-fannie-mae-be-recognized-as-a-mortgage-utility/
Even if it is a few days old it is a good article that some people missed.
That is cruel but pretty accurate. A bad marraige. I have to believe she will come around.
So I guess we longs are all married to FnF. I guess that is what tou mean. Anything else is too weird.
Yea I am lucky my health plan covers mental illness. Although I don't think that there is a cure for this except release from conservatorship.
Relax! That is the alcohol talking. I am down a lot but I was able to buy more. A little more. This or last week depending on your time zone. We are in good shape after the panic selling. Big buys this/last week.