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did the dumbass get himself pregnant?
hahahahaha...this "company" has been dead for years...they lied and ripped off shareholders and moved on to their next scam.
It is quite interesting to follow...it's most depressing and infuriating to see how the govt. is raping the FnF shareholders and blatantly bypassing and disregarding laws and policies they used on 99% of all bailout participants when applied to FnF.
yw...if you click a company link it will give you a much nicer layout and quite a bit of background on the progression of the money, along with a nice Bio.
Check out this link.
https://projects.propublica.org/bailout/list
It shows you who got govt. monies...how much...how much they paid back...how much govt. profit...how much they still owe the govt.
3 Reasons the United States Should Keep Fannie Mae and Freddie Mac
Link - http://www.fool.com/investing/general/2014/07/10/3-reasons-the-united-states-should-keep-fannie-mae.aspx
By Matthew Frankel | More Articles
July 10, 2014 | Comments (1)
The decision of whether or not to keep Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac (NASDAQOTCBB: FMCC ) around has been a topic of intense debate lately.
On one hand, we have a group in the Senate that wants to wind down Fannie and Freddie over a period of five years, and replace it with a network of private enterprises, which would have to help absorb some mortgage-related losses before the government helps. The idea is this arrangement will give an added incentive for responsible mortgage lending.
While this sounds good in theory, there are good reasons to keep Fannie and Freddie alive. The agencies are vital to the continued recovery of our housing market, helping struggling homeowners and providing an incentivized marketplace to move foreclosed homes through the market. In addition, keeping the agencies around is the right thing to do for shareholders.
1. Foreclosures
The housing recovery in the U.S. has made excellent progress, but there is still work to be done. According to the FHFA's latest foreclosure prevention report, about 4% (or 1.1 million) of Fannie and Freddie's mortgages are currently in some stage of delinquency.
About half of these are seriously (90 or more days) delinquent and a good portion of these will likely end up in foreclosure. And, as long as there is a steady stream of foreclosures hitting the market, Fannie and Freddie play a crucial role.
Both agencies have their own marketplaces designed to sell foreclosures quickly by incentivizing their purchase. Fannie Mae's HomePath and Freddie Mac's HomeSteps programs both offer special financing to buyers, allowing them to buy a foreclosed home for as little as 5% down with no mortgage insurance and no appraisal requirement.
There are also loans for homes needing renovations, as well as a variety of options for investors. There are currently tens of thousands of homes listed by the programs, and until the foreclosure epidemic is truly over, these two programs play an essential role in moving tough-to-sell homes through the marketplace quickly.
2. Homeowner help
Fannie and Freddie also play a very important role in helping struggling homeowners stay in their homes. If a homeowner owes more than their home is worth, or simply has a very expensive adjustable-rate mortgage, the agencies offer programs to help.
During the first quarter alone, nearly 55,000 home loans were modified by refinancing, changing the interest rate, extending the loan's term, or simply by reducing the principal balance of the loan.
Before dismantling Fannie and Freddie, there needs to be a similar assistance program in place to deal with the homeowners still struggling as a result of the housing crash.
3. Investors deserve a chance to profit
Several government officials have made it abundantly clear that it is not their priority to make sure Fannie and Freddie's shareholders are taken care of.
While it's completely understandable to prioritize a stable and healthy housing market over the desires of investors to profit, the government should still do the right thing here. Fannie and Freddie have repaid every dime they received as a bailout, and the Treasury has actually seen more than $25 billion in profit from the agencies.
A group of shareholders led by Fairholme Capital's Bruce Berkowitz has said the agencies could be restored as private companies, a statement which has been contested by Treasury officials. In all, the Treasury is facing about 20 different shareholder lawsuits challenging the current arrangement, under which 100% of Fannie and Freddie's profits go to the government. Even the preferred shareholders aren't getting anything.
While this is a matter for the courts, the shareholders make some good points. For instance, if shareholders were to be left with nothing, why were the common and preferred shares allowed to keep trading? And, Fannie and Freddie were placed in "conservatorship", and what that is supposed to mean is certainly not what is happening now.
What is most likely to happen
I believe Fannie and Freddie will be kept alive for the foreseeable future, simply because of their vital role in the very fragile housing recovery. Congress and the U.S. Treasury are both scared to death of undoing the progress that has been made so far, and will err on the side of caution when making policy decisions regarding Fannie and Freddie.
As far as the shareholders are concerned, it is anyone's guess. It's really hard to make the case investors who own the common and junior preferred shares don't deserve a cut of the profits. However, this doesn't mean they'll prevail in court.
If Fannie and Freddie are kept alive, there is a good chance the courts will allow investors to share in the profits. It could also go the other way just as easily, leaving shareholders with nothing.
Whatever happens, Fannie and Freddie are simply too vital to the U.S. housing market right now to get rid of. Ideally, there will come a time in the future when the agencies are no longer needed to create and maintain a healthy and accessible mortgage market, but the time has not come just yet.
yes, they do have positions in both fannie and Freddie
http://money.usnews.com/funds/mutual-funds/short-term-bond/blackrock-us-mortgage-portfolio/bmpax/holdings
http://money.usnews.com/funds/mutual-funds/short-term-bond/blackrock-us-mortgage-portfolio/bmpax/holdings
June 26 was a 9 cent div
Let me rephrase my question now that you've clarified who makes the decision.
Is it normal procedure...or even legal for the government to supply and pay for the defense of a non-government entity? And have the taxpayers foot the bill?
What I am seeing is this.
Private investors (which are taxpayers)are suing an entity which they claim is part of the government.
The government is defending this entity they claim is NOT part of the government using government resources to do so.
The people (which are taxpayers) suing the purported government entity is paying for the cost of their lawsuit
The people (which are tax payers) suing the purported government entity is paying for some of the cost of the government's defensive efforts in this lawsuit as they share the taxpayer burden of government spending.
Question...if FHFA is NOT a part of the government for this particular lawsuit...and I do understand their reasoning ...or should I say thought process on this...why would they be allowed to use government lawyers to defend FHFA?
What Is the Federal Government Hiding About Fannie Mae and Freddie Mac?
By Richard Epstein
June 19, 2014
http://www.realclearmarkets.com/articles/2014/06/19/what_is_the_federal_government_hiding_about_fannie_mae_and_freddie_mac_101130.html
At present the United States is embroiled in litigation with Fairholme Funds over the so-called Third Amendment to the Senior Preferred Stock Purchase Agreement (SPSPA) that it entered into on August 17, 2012. It did so through the Federal Housing Finance Authority (FHFA); the latter in its role as conservator of both Fannie Mae and Freddie Mac. At issue in that and other cases is the full dividend sweep, whereby FHFA agreed to hand over to the United States Treasury all of its net earnings, forever, so that the underlying advances could never be re-paid, no matter the future condition of Fannie and Freddie.
I have written about these issues on multiple occasions as an outside consultant for several institutional investors. The central point of this message is that there is no intelligible reason why FHFA should hand over all the income of Fannie and Freddie in exchange for nothing at all. This transaction is not a foreclosure, and it's not because Fannie and Freddie are not in default. It is an outright transfer of wealth under the terms of the Senior Preferred Shares Agreement.
In dealing with this case, the federal Government in its motion to dismiss took the position that the Third Amendment was justified because of legitimate fears about the long-term financial viability of both Fannie and Freddie. In so doing, it made the conscious decision to challenge the factual accuracy of Fairholme's complaint, which asserted that both Fannie and Freddie had returned to financial health. The federal government's motion to dismiss thus put into issue the financial prospects of both entities. Fairholme promptly obtained from Judge Margaret Sweeney an order seeking discovery of relevant material on that question prepared before and after the adoption of the Third Amendment, as clearly relevant to the matter at hand.
On May 30, 2014, the government sought a protective order claiming that the production of this information would "Interfere With The Operation Of The Conservatorships In Violation Of HERA And Impermissibly Intrude Into The Deliberative Process" [of key government officials]. In support of that contention, FHFA Director Watt insists that "The disclosure of any plans relating to ongoing and future operation of the conservatorships, including the projections of the future profitability of Fannie Mae and Freddie Mac (or lack thereof) under a range of economic, business and policy scenarios can be anticipated to have a destabilizing effect on the Nation's housing market and economy."
On June 10, 2014, Fairholme filed its response. I admit to a partisan interest in this case. But this case is not even close. The Affidavits of key government officials, including the passage quoted from Director Watt, have a cookie-cutter quality about them. Their abstract assertions give no explanation as to how the release of this information can have the deleterious consequences that they claim. The most obvious explanation for the federal government's reticence is that it will be embarrassed by some revelation that its own internal deliberations will show that the Government's public face is an elaborate ruse to divert all of the wealth that would have gone to the private shareholders of Fannie and Freddie under the SPSPA.
At the very least, as Fairholme points out in its brief, the documents could be turned over to the plaintiff with an order that they not be published or used outside the litigation. Yet even that remedy seems extravagant in this case given that the government on multiple occasions made its own projections on the financial status of Fannie and Freddie or various scenarios. It does not help the Government's case that many of the documents sought were prepared close to two years ago, and thus have little if any direct relevance on today's market in their shares, whose only value is that of the lawsuits brought against the federal government.
Nor does the current law back the federal government's position. A similar contention was made by the federal government in the very different litigation of Starr International v. United States, where the Court held that "y choosing to put the Government's knowledge of its own authority under Section 13(3) of the Federal Reserve Act [relating to the Federal Reserve Bank to issue an emergency loan to AIG) at issue, questions of the Government's intent and understanding of the scope of its authority to enter into the loan commitment are directly relevant to this litigation." That same conclusion applies to this case as well. These documents should be produced, and they should be published as well, unless the federal government can offer a far better justification for their concealment than it has offered to date.
Richard A. Epstein is the Laurence A. Tisch Professor of Law at New York Univerity, a senior lecturer at the University of Chicago, and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.
STEALING FANNIE AND FREDDIE
Jonathan Macey1 and Logan Beirne2
1 Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law, Yale Law School.
2 ISP Fellow, Yale Law School.
3 According to Forbes Global 500, available at http://money.cnn.com/magazines/fortune/global500/2013/full_list/?iid=G500_sp_full.
Politicians are running rough-shod over the rule of law as they seek to rob private citizens of their assets to achieve their own amorphous political objectives. If we were speaking of some banana republic, this would be par for the course – but this is unfolding in the United States today.
“The housing market accounts for nearly 20 percent of the American economy, so it is critical that we have a strong and stable housing finance system that is built to last,” declares the Senate Banking Committee Leaders’ Bipartisan Housing Finance Reform Draft. The proposed legislation’s first step towards this laudable goal, however, is to liquidate the government-sponsored enterprises Fannie Mae and Freddie Mac – in defiance of the rule of law. This paper analyzes the current House and Senate housing finance reform proposals and faults their modes of liquidation for departing from legal norms, thereby harming investors and creditors, taxpayers, and the broader economy.
Under proposals before Congress, virtually everyone loses. First, the GSEs’ shareholders’ property rights are violated. Second, taxpayers face the potential burden of the GSEs’ trillions in liabilities without dispensing via the orderly and known processes of a traditional bankruptcy proceeding or keeping the debts segregated as the now-profitable GSEs seek to pay them down. Finally, the rule of law is subverted, thereby making lending and business in general a riskier proposition when the country and global economy are left to the political whims of the federal government.
I. Background
The Federal National Mortgage Association (commonly known as “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) are privately owned, for-profit mortgage finance companies whose shares trade on the New York Stock Exchange and remain two of the largest companies in the world, as measured by both asset value and revenue.3 They are known as “government sponsored entities” (“GSEs”) due to their federal charters, which charge each with providing stability and assistance to the secondary mortgage market and promoting access to mortgage credit.
Fannie Mae was created as federal government agency by Congress in 1938 amid the en masse mortgage defaults of the Great Depression. It was charged with creating a liquid market for residential mortgage-backed securities, with the aim of encouraging homeownership. Fannie Mae succeeded in its mission of creating a liquid market, but in the process accumulated substantial debt. In fact, it grew so large that by 1968 President Lyndon Johnson, faced with mounting public debt during the Vietnam War, moved Fannie Mae’s debt portfolio off of the federal government’s Electronic copy available at: http://ssrn.com/abstract=2429974
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balance sheet by converting it into a publicly traded company owned by investors.4 Mirroring Fannie Mae, Freddie Mac was then created in 1970 to prevent its predecessor from acting as a monopoly. It eventually went public in 1989. Both were consistently highly profitable over the decades and are now responsible for backing 90% of mortgages.
4 For a succinct overview of the GSEs’ history, see Kate Pickert, “A Brief History of Fannie Mae and Freddie Mac”, Time Magazine (July 14, 2008), available at http://content.time.com/time/business/article/0,8599,1822766,00.html.
5 12 U.S.C. § 1455(h) (2006) (regarding Freddie Mac’s obligations and mortgage-backed securities); id. § 1719(b) (regarding certain Fannie Mae obligations); id. § 1719 (d), (e) (regarding Fannie Mae’s mortgage-backed securities and subordinated or convertible obligations). David Reiss, The Federal Government's Implied Guarantee of Fannie Mae and Freddie Mac's Obligations: Uncle Sam Will Pick up the Tab, 42 GA. L. REV. 1019, 1023.
6 David Reiss, The Federal Government's Implied Guarantee of Fannie Mae and Freddie Mac's Obligations: Uncle Sam Will Pick up the Tab, 42 GA. L. REV. 1019, 1025.
7 White House Office of the Press Secretary, Obama Administration Auto Restructuring Initiative (Apr 30, 2009) (www.whitehouse.gov/the_press_office/Obama-Administration-Auto- Restructuring-Initiative).
8 See, e.g. A. Joseph Warburton, Law And The Financial Crisis: Economic Regulation During Turbulent Times, 60 Syracuse L. Rev. 531.
Historically, the federal government has explicitly refused to guarantee the companies’ liabilities. By statute, securities issued by Fannie Mae and Freddie Mac must contain an explicit disclaimer that they are “not guaranteed by the United States and do not constitute a debt or obligation of the United States.”5 As a longtime practical matter, however, the two companies “are so deeply enmeshed in the regulatory regimes of other American financial institutions that the federal government has effectively signaled that it would support Fannie Mae and Freddie Mac if they were unable to make payments on their obligations.” 6 This largely came to pass during the financial crisis of 2008.
II. Flawed Model: Chrysler and General Motors
During the severe economic downturn of 2008, many institutions suffered. The federal government’s reaction was as chaotic as it was mixed – e.g. orchestrating the sale of Bear Stearns, allowing Lehman Brothers to fail, propping up Citigroup on favorable terms, bailing out AIG multiple times. For automotive giants, Chrysler and General Motors, the government resorted to a “political bailout.”
Instead of the traditional bankruptcy reorganization process, the Obama Administration opted for a “quick and surgical” reorganization that would “make it easier for Chrysler and General Motors to clear away old liabilities.”7 The bankruptcy process is meant to follow standard rules in which the proceeds of unencumbered assets are distributed to creditors according to a strict priority schedule, governed by the nature of each creditor’s claim. Secured creditors, such as bondholders, come before the unsecured creditors, which in the case of Chrysler and General Motors included union health and retirement funds.8 -3-
However, the unsecured – but politically powerful – United Auto Workers union (“UAW”) was offered special treatment. The Obama Administration tied the large sums owed to the UAW to the companies’ assets rather than discharging these liabilities along with the other unsecured creditors.9 In this way, the Government elevated the unsecured claims of organized labor above the secured claims of investors, overturning well-established creditor priorities in bankruptcy. This comes in spite of the Bankruptcy Clause’s uniformity requirement, which has long held to prohibit Congress from enacting bankruptcy laws that specifically apply to just one named debtor.10 Following a comparable, politically-motivated course of action with Fannie Mae and Freddie Mac would be detrimental to taxpayers, lenders, and the economy at large.
9 Id.
10 Railway Labor Executives’ Assn. v. Gibbons, 455 U.S. 457.
11 Particularly, the Office of Federal Housing Enterprise Oversight.
12 Fannie Mae and Freddie Mac had reported losses and faced sinking share prices but were nevertheless able to meet all obligations to all creditors up to and including when placed into conservatorship.
13 3 See, e.g., FDIC, RESOLUTIONS HANDBOOK 70–71 (2003), available at http://www.fdic.gov/bank/historical/reshandbook/index.html
(last visited Feb. 19, 2014)
14 12 U.S.C. § 4617(b).
15 In May 2009, this amount was extended to $200 billion.
III. Federal Takeover
As the mortgage crisis gain momentum in 2007, Fannie Mae and Freddie Mac bowed to pressure from its federal overseers and began to purchase subprime and other risky securities in order to support the economy.11 Partially as result of this increase in subprime holdings, the companies were hit hard by the financial crisis of 2008.12
Although the GSEs never reached the point of insolvency, they experienced heavy losses and Congress enacted the Housing and Economic Recovery Act of 2008 (“HERA”), pursuant to which the federal government placed the companies into conservatorship. As conservator, the FHFA’s duty is to conserve the companies’ assets for the benefit of the common and preferred shareholders with the expectation that the companies will return to sound condition in the future.13 Under section 1145 of HERA, the Federal Housing Finance Authority (“FHFA”, the independent federal agency that regulates the Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks) may “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.”14
Acting via the Secretary of the United States Treasury (“Treasury”) and FHFA, the government entered into senior preferred stock arrangements (the “Stock Agreements”) with Fannie Mae and Freddie Mac, whereby Treasury would advance $100 billion15 in exchange for $1 billion in shares of senior preferred stock with a cumulative 10% dividend and would be increased dollar-for-dollar by any amounts Treasury invested. Pursuant to the Stock Agreements, each company also issued -4-
Treasury 20-year warrants to purchase 79.9% of the common stock for a mere $0.00001 per share.16 The FHFA Office of Inspector General acknowledged that these actions exacted a heavy toll on the existing shareholders' holdings.17 And despite the popular narrative that such investors were all leviathan hedge funds, many community banks invested heavily in preferred shares.18
16 Complaint, Washington Federal v. U.S. 13-385 C, page 3. https://docs.google.com/a/matterhorndata.com/file/d/0B6ofth-ELqJpcmRrZ3FpSWl6ZGs/edit?pli=1.
17 Id.
18 Nick Timiraos, Fannie-Freddie Bill Leaves Little for Shareholders, The Wall Street Journal (Jun 5, 2013), available at http://blogs.wsj.com/moneybeat/2013/06/05/fannie-freddie-bill-leaves-little-for-shareholders/.
19 Complaint, 9.
20 Treasury Department Announces Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac (Aug 17, 2012), available at http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx (capitalization of the heading is altered).
21 12 U.S.C. § 4617(b).
22 Richard Epstein, Grand Theft Treasury, DEFINING IDEAS (Jul 16, 2013) available at http://www.hoover.org/publications/defining-ideas/article/151966.
23 Id.
Rather than working as conservator to benefit Fannie Mae and Freddie Mac’s common and preferred shareholders, as is its obligation under traditional conservatorship law, the FHFA acted for the benefit of the U.S. government – and to the detriment of those private shareholders. Subsequent to the Stock Agreements, the government also forced the companies to delist their shares, suspend shareholder meetings, assume additional subprime assets, and accept tens of billions of dollars from the Treasury that were not necessarily needed to maintain solvency.19 In fact, as the company returned to profitability in 2012, the government used an administrative procedure to pass the Third Amendment to the Stock Purchase Agreement, thereby requiring “a full income sweep of all future Fannie Mae and Freddie Mac earnings to benefit taxpayers for their investment.”20 Fannie Mae and Freddie Mac are generating cash – enough to more than repay the $187.5 billion in emergency funding received from the government during the downturn – but have been forbidden from using that income to “put the regulated entity in a sound and solvent condition.”21
“The purpose of a conservatorship is to preserve the assets for the benefit of the individuals whom it represents,” as Richard Epstein notes, “which in this instance covers both classes of shareholders. Accordingly, the conservator represents the shareholders in their relationship with the government. Under standard corporate law principles, that conservator is bound, by a strong fiduciary duty to protect the corporate assets for the benefit of both common and preferred shareholders.”22 In the case of Fannie Mae and Freddie Mac, however, “the designation of the FHFA as the conservator created an impossible conflict of interest. The Boards of Directors of Fannie Mae and Freddie Mac were shut out of the deliberations that took place exclusively between branches of the federal government.”23 In pursuing their mandate to protect the third party taxpayers, the government is neglecting its duties to the shareholders – something that under traditional corporate law runs counter to a conservator’s role. -5-
IV. Proposed Reform
The proposed housing finance reform legislation in the House and Senate seeks to continue down this path of eschewing legal norms. The H.R.2767 Protecting American Taxpayers and Homeowners Act of 2013 (“PATH Act”), S.1217 Housing Finance Reform and Tax Payer Protection Act of 2013 (“Corker-Warner Bill”), and Amendment to S. 1217 Housing Finance Reform and Tax Payer Protection Act of 2014 (“Johnson-Crapo Bill”) all seek to wind down the once again profitable companies without adequately protecting shareholder interests.24
24 Rep. Maxine Water’s “Housing Opportunities Move the Economy Forward Act of 2014” does not seek to codify Treasury's takings.
25 See e.g. Andrea J. Boyack, Laudable Goals and Unintended Consequences: The Role and Control of Fannie Mae and Freddie Mac, 60 Am. U.L. Rev. 1489 (June 2011).
26 Section 101 of H.R.2767; Section 501 of S.1217; Section 602 of Amendment to S. 1217.
27 See, e.g., claims filed in Fairholme Funds v. FHFA and Perry Capital v. Lew. Epstein, supra note 12.
28 Section 604 of Amendment to S. 1217
29 364 U.S. 40 (1960), as quoted in Epstein, supra 18.
Despite the debate over whether to preserve these now-profitable GSEs or perhaps sell them to private parties,25 the proposals repeal the GSEs’ charters and provide for the government to liquidate each.26
Each of the proposed bills compounds the government’s dereliction of its duties under the Administrative Procedure Act (APA).27 HERA was designed to return the GSEs to a sound and solvent state, but the government’s self dealing (between the FHFA and Treasury) is violating the statute’s safeguards and is instead absorbing and dissolving the interests of those private shareholders HERA was designed to conserve. For example, Sec. 604 of the Johnson-Crapo Bill states, “The wind down of each enterprise must be managed by FHFA to obtain resolution that maximizes the return for taxpayers,” thereby ignoring obligations to shareholders.28
The reforms’ proposed liquidations in effect finalize the government’s taking of the GSEs’ shareholders’ property. In the words of Armstrong v. United States, the just compensation requirement of any taking was intended to prevent the government from forcing “some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”29 But with the proposed liquidations, the government appears to be doing precisely that. As it continues to force the companies to invest in and hold toxic securities, the government is siphoning away the profits that the companies might use to regain their footing; and Congress plans to drive them into the ground without exploring other approaches that may help shareholders’ recoup losses.
In fact, the Obama Administration in November 2013 rejected a corporate bid for the GSEs’ insurance businesses. Rather than allow private businesses to invest $52 billion in an effort to restructure Fannie Mae and Freddie Mac into profitable private companies that follow industry -6-
best practices,30 the Administration has promoted the proposed legislation – and, along with it, the politically-motivated liquidation it entails.
30 Tom Risen, White House Opposes Privatizing Fannie Mae and Freddie Mac, New York Times (Nov 23, 2013), available at http://www.usnews.com/news/articles/2013/11/21/white-house-opposes-privatizing-fannie-mae-and-freddie-mac.
31 Federal Housing Finance Agency, Enterprise Share Of Residential Mortgage Debt Outstanding: 1990–2009 [hereinafter “FHFA Chart”], available at http://www.fhfa.gov/webfiles/15556/Enterprise%20share%20of%20Resident%20Mortgage%20Debt%20Outstanding%201990_%202009.xls.
32 The GSE liabilities will only need to be covered by taxpayers if there is another downturn in the housing market.
33 Tom Raum, US rescue of Fannie, Freddie poses taxpayer risks, USA Today (Sep 8, 2008), available at http://usatoday30.usatoday.com/news/washington/2008-09-08-127573146_x.htm.
34 p. 3 and p. vii of the 2010 CBO report.
35 As discussed supra, the Obama Administration rejected a corporate bid for the insurance business of Fannie and Freddie.
36 Others have written of the inadequacies of the Bankruptcy Code as a mechanism for resolving systemically important institutions and discussed possible reforms to the Code. See, e.g. Edward Morrison, “Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions?” 82 Temple Law Review 449 (2009); David Reiss, “An Overview of the Fannie and Freddie Conservatorship Litigation”, Draft Journal of Law & Business (forthcoming 2014). It is not the purpose of this paper to make broad claims about the best route for all institutions, but instead to evaluate the proposed liquidation specific to Fannie Mae and Freddie Mac. While the Code may present challenges with regard to speed and flexibility during crises, not only were these companies never insolvent, they have stabilized and
Further, the Senate proposals potentially burden taxpayers with Fannie Mae and Freddie Mac’s enormous liabilities. According to economist James Hamilton, the mortgage giants’ liabilities amount to $5.2 trillion,31 representing a 29.6% increase to the record $17.54 trillion national debt should the full sum be pulled onto the federal balance sheet.32
The proposals effectively reverse LBJ’s 1968 removal of Fannie Mae’s debt portfolio from the U.S.’s books. As the Associated Press reported in 2008, “with the government takeover of Fannie Mae and Freddie Mac, U.S. taxpayers now essentially own the bulk of the nation's mortgage market.”33 In other words, when Fannie Mae and Freddie Mac went into conservatorship in September 2008, the two GSEs became, in the words of the Congressional Budget Office, “governmental,” and this “effectively made the government’s backing of their debt securities and [mortgage-backed security] guarantees explicit.”34 Rather than maintaining these profitable companies, selling them to private parties,35 or discharging the debt via a traditional bankruptcy process,36 the Senate proposals seek to codify this massive burden by pledging the full faith and
thereby further imperiling the nation’s credit rating, curtailing economic growth, spurring inflation, threatening social programs, and diminishing the nation’s social, economic and political power.
37 Section 501 of the Corker-Warner Bill, Section 604 of the Johnson-Crapo Bill. But see, Rep. Maxine Water’s “Housing Opportunities Move the Economy Forward Act of 2014”, which does not seek to codify Treasury's takings.
38 Chapter 7 would likely not be a good vehicle for something so large, but, in theory, a Trustee would be appointed, and she or he would distribute assets according to priority.
39 11 U.S.C. §1129(b)(2)(B)(ii).
40 While we cannot know the identities all of the GSEs’ investors they are almost certainly not a monolithic group of hedge funds but also likely include individuals’ 401ks and
In a traditional bankruptcy proceeding under Chapter 11 of the Bankruptcy Code,38 the plans for liquidation of Fannie Mae and Freddie Mac must comply with the absolute priority rule. 39 After payment of the inevitable administrative expenses – attorneys and accountants for the Debtor, the committee of creditors, and the likely committee of equity holders – secured creditors must be made whole before any other claimant may receive any recovery. Next, priority claims, such as tax claims, must be paid before unsecured claims (effectively all debts for which no security interest has been pledged) are then paid. Finally, the equity holders would recover, with preferred shareholders receiving higher priority than common shareholders. This is the orderly process by which debts are equitable discharged that has long marked the liquidation of private companies and has been internalized by the market.
Under the proposed liquidations, however, virtually everyone loses. Not only are the GSEs’ shareholders’ property rights are violated, the U.S. taxpayers face the burden of the GSE’s trillions in liabilities without dispensing via the orderly and known processes of a traditional bankruptcy proceeding or keeping the debts segregated as the now-profitable GSEs seek to pay them down. Finally, the rule of law is subverted, thereby making lending and business in general a riskier proposition when the country and global economy are left to the political whims of the federal government.
The United States was founded on a firm commitment to Americans’ property rights. In fact, of the Declaration of Independence’s charges against King George III, a majority of the ten are offences against private property. The political winds of the moment make it popular to extract short term taxpayer advantage on the backs of what is popularly perceived as the moneyed hedge fund shareholders of the GSEs;40 however, we cannot permit such political pressure to allow crony capitalism to take hold as the government picks the economy’s winners and losers by changing the rules of the game. In the longer run, the governments’ handling of Fannie Mae and Freddie Mac could subvert certainty and order – a key competitive advantage for the U.S. economy in attracting investment. With Chrysler, General Motors, and now Fannie Mae and Freddie Mac, a growing number of precedents erode the rule of law that has enabled the United States to thrive.
CAPITOL FORUM CONFERENCE CALL TRANSCIRPT
THE FUTURE OF FANNIE MAE AND FREDDIE MAC: LITIGATION RISK
AN INTERVIEW WITH NYU LAW PROFESSOR RICHARD EPSTEIN ON 12/11/13
http://www.fairholmefunds.com/fannie-freddie
MODERATOR: Welcome to the Fannie Mae and Freddie Mac conference call with Richard Epstein. It is now my pleasure to turn the conference over to Mr. Teddy Downey. Please go ahead.
MR. TEDDY DOWNEY: Thanks to everyone for joining the Capitol Forum’s second conference call on the future of Fannie Mae and Freddie Mac. I’m Teddy Downey, Executive Editor here at the Capitol Forum and we’re delighted to have esteemed Professor Richard Epstein here with us today.
As a quick introduction, Professor Epstein is currently a professor of law at New York University and was previously on the faculty at the University of Chicago and the University of Southern California. Richard also serves as a senior fellow at the Hoover Institution and is the author of over a dozen books, including his latest “The Classical Liberal Constitution: The Uncertain Quest for Limited Government”.
Perhaps most importantly, Professor Epstein specializes in complex regulatory takings cases. And finally, an important note, Richard is currently doing work for certain firms involved in the litigation against the government.
Also before we get started, a few quick things to note. I’ll spend the first thirty minutes or so interviewing Richard, and then we’ll turn it over to the audience for questions. If you have a question, please email editorial@thecapitolforum.com.
And with that, let’s get started. Professor Epstein, thanks again for joining us. I think the most interesting thing here and one thing I want to separate out is what you think should happen and what you think is likely to happen.
So if you wouldn’t mind maybe starting off talking about your legal, ideological framework for viewing this case, and then talking for a minute about how the judicial system and the judges that are likely to hear some of these cases, what their framework will be. And if we can start with that, maybe that will give people the context to view this conversation through
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MR. RICHARD EPSTEIN: That’s the right place to begin. And it’s not a simple – it’s a rather long story. To make it as short as I can, the basic orientation that I give towards virtually every legal problem that I face in any area is captured in the title of my book “The Classical Liberal Constitution”.
Classical liberal differs in substantial ways from the libertarian by two major features. They have no categorical opposition to the use of the eminent domain law and they have no categorical opposition to the use of the taxing power.
But by the same time, they are deeply suspicious, particularly at the federal level, of mandatory programs of government redistribution. Because if that joker is led into the deck, then virtually any particular substantive result that you care to achieve can be justified by that kind of end. Or to put it another way, what the takings and taxation positions that I take are, it’s all right to take from A to give back to A something greater than he lost. But it’s not okay to take away in large sums from A in order to give to B, particularly if B doesn’t do anything in return for A. And, in fact, if there is reciprocity, it’s called implicit in kind compensation and it’s what keeps the system of taxation going.
Now, with this particular framework, your judicial attitude is that you must take the takings clause seriously. That in turn then leads you to answer what to lawyers is an obscure but vital question: What’s the appropriate level of scrutiny that you give to various issues under the takings clause? And scrutiny essentially is a function of what you think to be the error rate of too much government action or too little.
And in my view, the danger of government over-action is extremely important. So what I want to do is to have a fairly high level of scrutiny with the way in which government programs work. Not to make sure that you can’t solve standard collective action problems like runs on banks which have been long upheld, that is legislation against it, but to make sure that the redistribution angle of this thing does not overwhelm everything that you have.
If in fact you apply that situation, you do not draw any categorical distinction between outright occupation of particular forms of property or “mere regulation” of that property and you draw no distinction between physical assets that can be occupied and financial assets or other intellectual property type assets that are all forward in the rubric of private property.
So under this particular orientation, when you look at something like what we’ve seen in this case with Fannie and Freddie, you have two reactions. The 2008 situation is exceedingly complicated because it was never quite sure whether or not these firms were or were not insolvent. There would be a lot of government discretion figuring out how you combat the particular dangers of running.
There were two vehicles available for the government. One was the conservatorship and one was the receivership. If you take the conservatorship route, as they did--and for good reason I believe--it means that you're now committed to the business of rehabilitating these companies and returning Fannie and Freddie to the private sector.
If you took the receivership situation, orderly liquidation would be the appropriate situation with residual values after expenses going to these same shareholders. The conservatorship puts you in a very different position and there are many features of it which I do not like in particular. The 79.9 percent common shares being subject to the option and there is some argument, although I don't think one of constitutional proportions, as to whether or not the interest rate on the senior preferred at ten percent would or would not have been appropriate.
So in my view what happens is the first case is a complicated one. I do believe that the Washington Federal people in principle have a fairly strong case about the way in which that has been handled. But on the third amendment, which is the thing that converts the senior preferred from ten percent to essentially everything, is in fact basically a complete non-starter and should be forthwith and summarily shutdown. And nothing that the government wrote in its two briefs that I've read so far, both for Fairholme and for Washington Federal, changes that conclusion.
When you start to deal with the question of the law as it is, it is a very different situation. First of all, any sort of systematic concern with respect to redistribution is very much put on the back burner. And any doubts that one has about the efficiency of regulation is also put on the back burner. And any argument that the rules that apply to the outright possession of land and carries over to regulatory arrangements is squarely rejected within this system in not all, but in many, many cases.
So what this does is it translates into a general view that the Constitution should be construed under a rational basis stand which means that if there’s one or two things that the government can say on behalf of its program, then the courts do not look closely at the means that are used in order to achieve the end in question. And to the extent that one is dealing with financial arrangements that are reviewed under the rational basis test, it's extremely difficult for any claimant against the government to be able to do that.
So there’s no question that the government has at this point a very strong leading position on this issue going into it. But the situation turns out to be much more complicated than that because there is at least one opposition strand that has to be taken into account and it has three separate parts to it.
One is it’s quite clear that there’s a per se rule with respect to possessory takings of real estate, and that can easily translate to situations where the government gobbles up your money on the one hand, just takes it out of a particular private account or where in fact it imposes regulations that make it impossible for you to use it by giving itself the use.
So, the government cannot essentially borrow money from a private party and arbitrarily set the rate of interest and hope to stave constitutional scrutiny. The argument here is that financial claims against private assets are liens and that liens are governed by the same rules that govern occupation. So that's one strand.
The second strand is that there’s a long history which deals with confiscatory regulation which says in effect that when the government regulates industries to control monopoly preferences, what it has to do is to make sure that it gives them at least a competitive rate of return adjusted for the risk involved. And although there’s lots of discretion in the means that you use to achieve that particular end, there’s much less means available for you in terms of the way in which you could try to avoid that end. And many recent cases have said if the government just sets the wrong rate base for compensation, then it cannot systematically defend itself.
And the third line of cases is the Winship line of cases which says that when the government enters into contracts with private parties, it is required to deal with those parties under the rules that apply to ordinary contracts between ordinary people so that it doesn’t get the kind of advantage that it gets in the regulatory arena.
The leading case on that is the Winship case from the mid-90s. It is no accident that Chuck Cooper and David Thompson who are leading the charge at Fairholme were in fact the winning lawyers in that particular case. Nor is it I think any accident that this particular case involves not a form of general regulation, but in fact involves the explicit contractual arrangement that was entered into by FHFA, the Federal Housing Finance Authority, with the Department of Treasury and with everybody else. Because those were contracts with respect to the issuance of a senior preferred.
So how does this then shake up? Well, if you apply the sort of generalized, diffuse rational basis test, you write the kind of brief that the government wrote in both Washington Federal and in the recent Fairholme case. And frankly, they’re very bad briefs.
They’re sloppy. They don’t give you particular statutory language. They cherry-pick facts. They argue questions of fact that are highly refuted on a motion to dismiss where those things are not to be allowed. They are, in effect, briefs which communicate the following message: We don’t take this case very seriously because we’re not really trying to sit down and figure out strong and coherent theories.
So where does it leave you? On the normative side, this case with respect to the amendment should be toast and it’s difficult with respect to the 2008 reorganization. Given the current law, what one has to remember is that there is always a strong government finger on the scale.
And what that does is it means that basically whenever you litigate against the government, the stronger your case may be, the more powerful you may think it to be, getting yourself over better than even money on winning that thing is extremely difficult. It is hard for people to realize what the extent of the deference is that is given to government. And if you don’t get yourself within the contract or the regulatory or the occupational sides that I’ve talked about, then the case is over.
Anytime the court begins with a sentence which says we confer upon the government broad discretion in figuring out how to deal with complex financial crises that are beyond our ken to understand, you don’t have to read the rest of the opinion. You know that the government is going to sweep the board.
So the first vital is to make sure that you fight over the classification of the case and then it becomes I think a closer struggle. Knowing that people like Chuck Cooper, David Boyse and Ted Olsen are on some of these cases, what you do is you have a kind of bipartisan elite lawyers representing many of these Fannie and Freddie claimants, and that suggests to me that it’s going to be a rough fight as you go down. I do not regard this as a kind of a government walk over. I think the government lawyers are underestimating the peril of their position. But on the other hand, one can never ignore the power of the basic presumption in their favor.
MR. TEDDY DOWNEY: I think that's a phenomenal context for digging into some of the weeds. And maybe the first thing, and you've already addressed a little bit of this, but maybe we can dig into more detail on the recent government response to the Fairholme case that you mentioned. You said that it was sloppily written, that it wasn’t taking things seriously. If you could just list for us or get into some detail about what you think the weakest points of that case are. Or is it not easy to do that?
MR. RICHARD EPSTEIN: No, no. It’s easy to do it. I mean, I try to summarize these things for my own purposes, particularly when I give private evaluations. But there’s no trade secrets with respect to this. The first thing with respect to this case is what I call the chutzpa claim which is the arrogance of saying that you guys have no right to be in this particular litigation at all because you do not have any technical standing to bring this suit. And the definition of standing with respect to the Constitution has the following account.
People take a clause which says the judicial power shall extend to all cases in law and equities covering a bunch of things, including suits against the government which would this be counting in. And what happens is the argument is that somehow or other, the individual shareholders whose holdings are essentially subordinated to a government lien which has become omnivorous don’t have standing to protest the fact that that priority’s been put upon it.
The government looks at the various authorization that’s found in the FHFA. And what that language seems to say, patterned on earlier stuff which gave government agencies power, that all rights of shareholders, all rights of officers, and all rights of the board of directors in these corporations are taken over by the executor. And the government says if that's the case, then you don’t have any claim to sue because your rights are all taken over. What that means, if you take it seriously, is that anybody who purports to be a beneficiary of a government conservator is essentially a supplicant at the government trough because all the rights of the shareholders have essentially been read out.
Now, this also came up in earlier cases like Winship and the government position has essentially been rejected on the simple ground that a conservator has fiduciary duties to the shareholders once it takes over the position of the board of directors, which also had fiduciary duties to the shareholders.
So it becomes almost inconceivable to say that once you take over the operation of this thing, there is nothing to conserve for anybody except the people to whom you wish to give money. The correct view therefore is as follows. When the government is engaged in trying to figure out how it deals with third party claimants, how it defends lawsuits, for example, that are brought against it by outsiders who claim that they’ve been bilked in the mortgage [?] situation. They have all of these powers and they can defend. Because what happens is they have to have these powers because the shareholders, the officers, and the directors have all been neutralized by the conservatorship.
So that's just fine. And the government in effect defends themselves against various types of claims by saying, you know, everybody out there who’s suing us had full knowledge of what's going on. At the same time, when they bring suits against J.P. Morgan or a variety of other banks, say, you know, you guys deceived us. So, on the one hand, the government claims ignorance when it’s a plaintiff, and full knowledge to everybody when it’s a defendant. I find the substantive positions rather dicey in dealing with this. But at least that turns out to be a reality. But if there is self-dealing between the government on the one hand through the Department of Treasury and through FHFA, then it turns out that the presumption that they have all rights of shareholders is impossible.
If you had a corporation which was put into bankruptcy and what the bankruptcy trustees decided to do, or the equitable receiver decided to do, was just give away the farm to a stranger or to somebody in whom it was cahoots, it would lose on the grounds that (a) it’s not an honest business judgment to give away assets when you're trying to preserve them and (b) that there’s an incurable case of self-dealing which requires that you get fair value back for everything that you've given out. Now, you can make that argument with respect to the ten percent preferred that took place in 2008, that it was a square deal. Harder to make it with respect to the common that gets wiped out because they’re getting nothing from the conservatorship if they are giving away an option which allows the Federal Treasury to buy the share at .0001 cents per share.
So I think in effect that they’re in deep trouble with respect to that issue. And I regard it as almost a stupendously kind of arrogant sort of claim to say that you look at something which could be read in a perfectly sensible fashion, and then read it in this way which basically says that the lawsuit is over before it began.
If this were in fact a true defense in this particular case, what the government should have been able to do in 2008 was to simply announce we’re taking you over and wiping you out. And they didn’t have to worry about the difference between a conservatorship and a receivership because they can wipe them under I have the power.[?]
And one of the bad things that the government does when it does this brief is it kind of constantly says that these powers are held by conservators and by receivers and it never bothers to distinguish between them. But remember, the objectives are very different. With the conservatorship, it’s orderly return to the private market which is certainly not happening here. And with respect to the receivership, it’s orderly liquidation with the preservation of the residual claim. So that's one procedural issue.
MR. TEDDY DOWNEY: Can I just interrupt you really quickly?
MR. RICHARD EPSTEIN: Sure.
MR. TEDDY DOWNEY: I have a hard time understanding how someone can make a case that what they’re doing right now is not making an orderly return to private shareholders because we don’t know the resolution of what’s going to happen to Fannie and Freddie. What are the arguments that they’re certainly not doing that, the point that you made?
MR. RICHARD EPSTEIN: Well, essentially what happens is if you take the benchmark as being the preferred agreement from 2008, what that says if things are fine, you pay us ten percent. And if they’re not fine and you have to make up your default, you pay us 12 percent.
So if you're thinking about this originally as saying indebtedness of around $180 billion and you look at ten percent, they’ve got to get paid $18 billion a year to keep the accounts current. I don't wish to argue anything about the legitimacy of that evaluation.
But with the third amendment, it gets introduced at a time when it’s quite clear that both Fannie and Freddie are about to return to profitability. And the fact that the government divines this as a factual matter on a motion to dismiss indicates no respect for the pleading rules whatsoever. And then it turns out that you probably have now well north of $100 billion which has been paid to the government above and beyond the amount of the interest payment. And you have the various folks in Congress Hensarling and Corker announcing since it was their contract, i.e., the contract of FHFA entered into with the government, they’ve already given us this money. So they’ll never be able to repay principle. So therefore, we could write them out with liquidation.
And the correct way to do this is to figure out what the arrangement was with respect to the 2008 agreement. And what you then do is treat the interest on that as indeed interest and anything above and beyond the amounts owed under that agreement are treated as a return of capital to the government. Which means that it reduces the amount of senior preferred that’s outstanding, and therefore, pumps up the value of both the junior preferred on the one hand and the common stock on the other. And the government, in its brief, never tells you the amount of money that's put into place and never explains why it is that this is something which is an incorrect way in which to treat this situation.
So this is really quite an extraordinary feat. I mean, I have never seen a scheme in any private transaction that I’ve ever worked with, including those involving self-interest, where a so-called contract renegotiation has been so utterly one-sided. And then the government official says, well, we’re representing you through FHFA. Now, there is this irony here. A second point, that the government makes which I haven’t talked about thus far, is who is the proper party and what is the proper forum? This is a jurisdictional issue which can be raised in virtually any case. Because if you wish to sue the government in the court, the Federal Court of Claims, you have to bring an action under the so-called Tucker Act, which doesn’t cover cases that sound in tort, whatever that phrase turns out to mean. And you cannot bring it against a private party.
And what the government has argued is that FHFA does not count as a government agency in this particular case. The argument presupposes that there’s an arm’s length difference between it and the United States Treasury. And one of the things that has to be resolved by litigation and discovery is exactly how that negotiation which was published on a Friday afternoon between these two government and non-government agencies took place. My view about it is it’s a straight conspiracy against the individual shareholders, that it would be almost inconceivable that the Treasury did not dictate the terms. And unless you could show some signs of real pushback, and there was actually nothing got through the supposed pushback by FHFA, then in effect what you can say is that the Treasury and the FHA together worked as a kind of a single body against the shareholders so you could bring this suit in the federal claims court.
The other thing is to say, well, you can’t go there. What we can do is sue you in ordinary district court. And it’s clear that the Fairholme guys are pretty shrewd and they bring both these lawsuits. My view is obviously one of them has to disappear. Unless you decide that there’s no connection between FHFA and the Treasury, which I can't believe would be sustainable. So that ultimately these are kinds of delaying procedural tactics which will not get in the way of a final resolution of the suit, but will make things take time.
And this is extremely important because the basic situation is that they keep shoveling this money out at a record rate into the hands of the Treasury. Now instead of trying to enjoin a transfer and instead of trying to say you get the credit for the amount, you're going to have to be suing the Treasury for a refund. Because it’s quite conceivable if this goes on for a year or two, they will not only be paying back all of the original loan with all of the original interest, but they’ll be paying amounts above and beyond that because this is the gift that keeps on giving. And there’s no sentiment in Congress whatsoever to reverse this. Corker and Hensarling are both Republicans remember.
So I regard this as kind of a version of I don't know what part of space I’m in. But those are the first two procedural claims that I didn’t refer to. And the government’s position is that if it can drag this thing out, what happens is it keeps on shoveling the money in. And if it keeps on shoveling the money in, reversal is more difficult. At some point, you may see somebody moving for a preliminary injunction which is extremely difficult to get. Because you have to show that in all events the government is likely to be wrong and that you have a very high probability of winning that particular lawsuit. And given what I said earlier about the strong presumption in favor of the government, it’s not clear you can do this.
I do think, however, that if you present the case in its correct form, the presumption in favor of the government should dissolve in the face of all the stuff that takes place with the record. And in answer to any of these things, the government’s brief is so bad. I mean, they cite cases almost at random, never once talking about how they relate. To give you one illustration, there’s the federal crop insurance program. And what happens is the administrator there has to be able to give its approval before there’s a transfer of ensured contracts between companies that are teetering on the edge of reorganization. That's clearly a government discretionary function. The government has no stake in the game between these two private entities that are trying to reorganize and consolidate their insurance losses. And never could you sue the government on a takings theory or anything else.
And what the government says is, well, we won this case because there was no private interest in private property that stood against the government. They don’t give you the facts. They don’t give you any of the reasoning. They sort of make it appear that when money is paid into the Treasury, it’s exactly the same thing as the veto of a consolidation or reorganization between two insurance companies.
I mean, it’s like that all the way through. I mean, it is a shockingly bad brief. One of the things that you do in order to see how bad it is, is as I have done, you go back and you take all the cited cases and read the statement of facts that are given even in summary form. And you realize that most of them are just miles away from the sorts of issues you're on.
And generally, there’s a good sign of what is a good brief and a bad brief. A good brief is one when it wants to rely on authority, tells you essentially what the case was about, gives you the ruling. Then it gives you some quotation as to what it is and then explains why it is when you've taken all these steps, you can now explain with a great degree of clarity why it is that that case comes out in your particular fashion. In neither of these two briefs has that been remotely tried for by the government which seems to me to say that they really are not trying to make a winning case on the merits. They are basically trying to say we win. And why is that? Because we’ve shown up. I mean, I was really quite disappointed. Not that I thought they had good arguments. But I was just -- the whole technical side of these briefs leave so much, so much, to be wanted.
MR. TEDDY DOWNEY: That brings us to another point. What is the hope that there will be a judge that won’t be overly deferential? Can you give examples of some judges who might be more likely to look at the merits and not just give the government such a huge benefit of the doubt?
MR. RICHARD EPSTEIN: Yeah, I mean, look. This case, much of it is in the District of Columbia Court of Appeals. And obviously, the reason they’re fighting so much about these recent nominations is because of the four-four versus five-four split. And the people who oppose--I guess her name was--Ms. Millett. Nobody doubted her qualifications. It would have been insane to try and do that. But there’s no question that you're more likely to find a receptive thing on the Republican side of the line than on the Democratic side of the line.
But on the Republican side of the line, there’s a deep cleavage between those who think that substantive commands ought to be respected and those who believe in judicial restraint. So you take very able judges who sit on that court, Steve Williams, Doug Ginsburg, both have senior status, Brett Kavanaugh and Ray Randolph, I mean, these are really smart people. They’re very torn on some of these issues. And they do not have the kind of muscular judicial review strategy that has characterized my view for the last thirty odd years, ever since the mid-80s I declared the New Deal unconstitutional as a matter of first principal in my takings book.
That doesn’t mean that they don’t come across on some of these issues. It just makes it harder to do. When you get to the Supreme Court, frankly my dear, it is an open crapshoot. We really do not know. There are certainly virtually every one of the conservative judges has some degree of orientation with respect to property claims in those cases where the treatment looks to be egregious, as I think it is in this case. You take somebody like Justice Breyer, an incredibly smart guy, who is a former telecommunications and antitrust lawyer, and he’s actually somewhat more property protective on these issues than you might expect. Justice Kagan, you know, hard case to read, but she used to go to Federalist Society meetings. And she along with Breyer essentially supported basically the brief that was brought by the NFIB with respect to the Medicare expansion, and they both struck it down. They didn’t do it on the same grounds as the more conservative people, but it tells you that this thing is open.
And ultimately, let’s put it this way. If the government win down below, I think there’s still, since the case is so big, a chance that the Supreme Court will take it. But I can guarantee you, if the Solicitor General shows up and says, you know, there’s just been a government judgment entered into against us for about $120 billion, cert granted. That's all they have to say. They don’t have to write up a petition. They don't even have to send a live body into the Supreme Court in order to get it. The Solicitor General has an enormous advantage in big cases in essentially commanding the attention of the Supreme Court, at least with the courtesy of a hearing. So I think in the end, this thing is likely to be resolved by the Supreme Court. And on that particular point, it’s actually not as clear as one might think. Remember, Winship was done six or so years ago. And there were several liberal Democrats, I think it was Souter in particular, who sided with the bank.
And that was the case for those of you who don’t know it in which the government entered into an explicit contract with the bank and said, you know what? We have to worry about your capital requirements. We’re going to allow you to take business goodwill and treat that as satisfying the capital accounts. One could disagree with this on the merits arguably and obviously. But once they did it, then they turned around and say, you know, we’ve changed our mind. Forget about this contract. You're in serious default because you don’t have the number of hard assets you need. And that case was won by Chuck Cooper and by David Thompson. So I think in effect a lot of this depends on slotting the case into the theory. And I see this thing going a very long way before it’s resolved.
I think Eppleports[?]is the best substantive judgment I can give today. There’s also another complication. If the government decides to exercise its option on the common, that will create another kind of real furor because of the opportunism that’s seen with respect to it. And that might actually incline the justices to say, look, this whole thing was completely jerry-rigged from the beginning. They’re getting ten percent. You don’t have to take 80 percent of the company from people for whom you're a fiduciary. And oddly enough, exercising that option might in the end actually strengthen the case of the people we’re trying to strike down, the various government arrangements under both the 2008 agreement and the 2012 amendment.
MR. TEDDY DOWNEY: That gives me a last question before we turn to the audience. As probably a very cynical person from D.C., born and raised. The Supreme Court not looking at some of the other political elements here. I mean, you've got effectively from a macro standpoint money going either to the taxpayer or to the government versus money going to shareholders in an entity that was rescued by the government.
MR. RICHARD EPSTEIN: Yeah.
MR. TEDDY DOWNEY: How does that shake out politically or influence anyone politically, either at the D.C. Court level or at the Supreme Court level?
MR. RICHARD EPSTEIN: Well, I mean, I think it's a fair question to ask. But one of the things to do is not only worry about these things that have gone into litigation, but also those that haven’t. Of the ones that went into litigation, the one that has the worst odor is the Chrysler/GM situation where essentially you had a reversal of priorities such that the general creditors in the pension plans were given priority over secured creditors, many of whom by the way were other union plants as you must remember under these circumstances.
That left a very bad odor in the financial community, and it also left, I think, a bad odor on the part of most of us who kind of regard ourselves as understanding something about this subject and the importance of having a consistent set of priority rules in place from the time that the money is lent to the time that the transaction is closed up.
So, I mean, that I think would influence the court. I don't think it’s particularly proud of that decision and its rather artificial role that it had played in it. So you have that. Then, of course, there are many of these things which essentially when they got done, the government paid back the money and basically sold the chairs or got its loans repaid so that there was something which could have been done in this case. Think of what happened with GM, the great celebration of having sold its last lot of shares and returning it to the private market. If they can do it in that case, why can’t they do it in this case?
Now, people will argue that the real loss in the GM situation was that they gave this huge benefit to the UAW which is not taken into account in these transactions. But certainly, somebody can say, hey, look at this thing. You're saying in effect that we got the money, the bailout was a success, and we put the business back into private hands. They could have said that as well here.
So I can conceive of the question asking why didn’t you follow the course that you did in every one of these reorganizations in connection with Fannie Mae? But this is two or three or four years down the road and the amount of intervening events that could alter this judgment one way or the other is almost impossible to predict at this particular point. What you can do is you can talk about the fundamentals. What is much harder to do is talk about the political dynamics.
MR. TEDDY DOWNEY: And with that, I’d just like to ask for questions again. Please email us at editorial@thecapitolforum.com. Maybe I’ll throw out a quick question to follow-up with you right there. What do you think the most important next steps are for watching how this whole thing plays out?
MR. RICHARD EPSTEIN: Well, I mean, you know, this is a question, I think it's going to have a lot do with the interaction, oddly enough, between the political side and the legal side. The first thing is I have no idea what will happen when Mel Watt takes over with respect to the litigation. That’s a wild card. I don't want to speculate on it.
But remember, there’s an effort at this particular point to try and recapitalize the private market. The amount of private equity available to fund mortgages is probably about two to three percent of what you would need if you take a kind of quote which says you've got to have basically a ten to one ratio. So if you want to support a $5 trillion mortgage market, you have to have $500 billion in invested capital.
My view is they’re not going to raise this money at all. If in fact, when they go into these things, into an investment community, and say, look, we did everything perfectly okay with respect to this Fannie and Freddie stuff. So don’t get upset about the loss of $150 billion, or whatever it’s going to turn out to be. Just treat it as part of the business.
At the same time, you're asking them to put in $500 billion.
And the thing about it is, well, maybe they won’t pull the same stunt that they pulled with respect to Fannie and Freddie or even the same stunt that they pulled with respect to GM and Chrysler. But once it becomes clear that there’s a bipartisan willingness on the part of governments to pull the rug out on private investment when it turns out that things have gone badly, I think the problem of general reform is going to be disastrous. And the question then is will the government decide to back down here in order to be able to get some kind of refunding, recapitalization, substitute entity, whatever you wish to call it, to take over these functions on the public side without killing off the private market.
And in my view, any private investor who would want to go into a mortgage market under some kind of symbiotic relationship where they’re a government sponsored entity who can be hit with very heavy community service obligations, subject to all sorts of shenanigans of this sort, I don't think the implicit guarantee, which I regard as a real thing, is actually enough in compensation, particularly in the going forward mode for these particular risks. So what's going to have to happen is sooner or later Corker and Hensarling are going to have to sit down with themselves and say do we really want to bind these people to “their contracts” when they had no say in everything and the entire investment community is up in arms?
And I might add, money doesn’t all go to Wall Street. Most of these guys actually have fiduciary duties to their own customers who include union funds, interestingly enough, on the pension side, universities, hospitals, churches, all sorts of private operations of one kind or another. I mean, it’s not as though what happens is all the money is going to go to a handful of 5,000 rich guys sitting in Manhattan and Stamford, Connecticut. It’s going to go to a very wide range of institutions.
So it’s the public taking, to some extent, from the public. And I think in the end if they start thinking about the distributional consequences, they will realize that if they want to raise money, they can’t play the redistribution game and hope for credible commitments that will get them up to anything close to $500 billion of private capital committed to this market.
MR. TEDDY DOWNEY: Thank you. That’s an interesting thing to look out for certainly. We’ve got a great question from the audience. Professor Epstein, what do you expect from the administrative record being filed or lack thereof if there is none?
MR. RICHARD EPSTEIN: Well, I think that the administrative record on this case in terms of public documentation is already particularly telling. And not only that, we also have a lot of public speeches by Demarco. We have I think a memoir was written by Hank Paulsen explaining how wonderful it was when he knocked some of this stuff down. And there’s no question that that makes its way into the Washington Federal complaint which is important because I think it shows just how tenuous the government’s insistence is that they got the consent of the board of directors to let the conservator take place. They got it under huge kinds of duress of what would happen to these people if they decided to resist all of that.
But there will be discovery. And the discovery will turn out to be absolutely key. And number one issue in my judgment on this discovery is exactly what deliberations took place between these two trading partners, FHFA and Treasury, at all points during this particular negotiation. If it turns out that FHFA took orders from very strong willed people like Hank Paulson and Tim Geithner, I think it puts a huge compromise inside the government’s case. And yet, I do not see how it is that they’re going to be able to keep this thing confidential under a discovery order when it’s so germane to the question of whether or not there was self-dealing in a very important sense.
So I think in fact the revelations that come out will systematically help the guys on the plaintiff side. And remember, you always have the question about, well, is there anything you could do in terms of discovery on the other side--that is going after these guys? And this is often the case when you have people suing to recover money who themselves have been active participants in a transaction. But you'll have a lot of people coming out there.
And frankly, I don't know the kinds of questions you want to ask a group of shareholders which do anything except go to the size of their losses. I mean, I can't believe that the government could come up with an argument which says to some extent when you were a private shareholder who bought this stuff, you had done something wrong. And I don't think they can make the argument that you were always on notice of how we played this game because the truth is the government was quite happy to keep these markets alive. And indeed, just before the breakdown in the market in 2008, the government was touting new issues in the way in which this was going.
I hope that people will realize that this two-faced GSE, Government Sponsored Entity, is an unstable business because you can never square the accounts between the mortgages you have to take under the various community redevelopment loans against the implicit guarantee on the other side.
The government has tried to make something out of that with respect to this litigation, and indeed has gone so far as to say, you know, if it hadn’t been for 2008, the third amendment wouldn’t arise. So therefore, we don’t have to worry about any of this at all. We should have won. But that's got to be wrong. The moment you allow a market to trade after the 2008 situation, it’s a clear symbol that these shares are supposed to have positive values. Which means that even if the option is against the common, it’s clear that you can’t wipe out the other 20 percent with the same technique that you do the first 79.9 percent. And it’s also clear that you've got to regard it as being some
MR. TEDDY DOWNEY: Really quick follow-up there. You mentioned that there could be a lot of discovery about the relationship between GSE and Treasury. There’s been some pretty overt public disagreement between Treasury and the White House and FHFA over other issues, not exactly relating to this. Do you think the discovery will have to be fact specific about the treatment of Fannie and Freddie? Or does the general understanding that Demarco has sort of refuted the administration on a number of issues create any level of independence there?
MR. RICHARD EPSTEIN: My view is if I were the plaintiffs, I would not care at all about Mr. Ed Demarco’s general position. It’s common knowledge that the reason he wasn’t given the permanent position under a Democratic administration is because they weren’t entirely happy with him. And they regard Mel Watt as somebody who’s more in alignment.
But the correct way in running your deposition is to have a narrow definition of relevance. And you do it with respect to the two transactions that matter and say it doesn’t matter the slightest bit one way or another, which is why we’re not asking about it, whether or not these guys have some differences about what should be the maximum size of a jumbo mortgage, or whatever those other questions should be.
In litigation, it’s a terrible strategy to go in a dragnet situation when the information you get won’t help you. And most of it is public knowledge. The interesting question is whether or not when the discovery takes place, the government can find any announcements of its own that it would like to make to offset what's revealed. I think the answer to that question is highly unlikely that they will try to do anything outside the discovery framework.
Look, my own experience with this is I helped organize at the university here at NYU a conference on Fannie and Freddie which we held on September 20th. And generally speaking, people who represent the government never feel free enough to speak in public to defend their position. And if they don’t want to speak at forums, they’re not going to speak after the discovery takes place.
So I think it's a question of what you can pry out of them. And I don't believe in this particular case that since the government is now in a contractual dispute that it can essentially argue that you can’t get discovery on this stuff which means, of course, that the motion to dismiss should be dead in the water. And I think it will be dead in the water. In fact, it’s quite clear that the government didn’t even write this thing with a recognition of the procedural posture in which the case is actually being undertaken.
MR. TEDDY DOWNEY: Okay, perfect. We’ve got another great question. Could you please comment on the APA case that the government overreached, breached fiduciary duties to minority shareholders, et cetera. The case you described is in Claims Court. I would be interested in your thoughts about the cases in District Court.
MR. RICHARD EPSTEIN: Okay. Well, I mean, you know, I have not studied those in great detail. But the basic claim here is what can you do with respect to this case under the Administrative Procedure Act? And here, let’s start with the simplest fact and then you can take it forward. One is that you have here a contract which limits the scope of the government power to making transactions up to the end, I think it is, of 2009. What happens is the APA or rather the third amendment takes place in 2012. They clearly do not have the authority to issue any new paper or do anything after that date. And so the argument would be that you've exceeded the authority that you're given under the operating statute and therefore suspect to challenges under the APA when you kind of treat this new transformative situation as though it's simply an amendment of an earlier agreement
.
There is all sorts of places for amendments. And so, for example, if what the government says is the reporting requirements under this thing don’t work particularly well. What we want to do is to change filing from this system to that system where everybody going forward can comply with the new system as well as with the old. Nobody is going to say it’s the kind of contract modification that really matters because there’s no necessary wealth transfer between the parties.
But in this particular case, it turns out that the so-called contract modification could be understood in the following way. What we’ve done is we’ve taken back all of the senior preferred that we’ve had and now we’re making a new issue of senior preferred which we’re not authorized to do and we’re taking back the farm in the form of dividends against that. And if you treat this as a recapitalization, which is the correct way in which to do it, it’s on such unbalanced terms that it can’t happen. Now, with respect to breach of fiduciary duty, this is the kind of claim that’s found sort of everywhere. It’s at the heart of the constitutional claim, and it’s also at the heart of the private law claims for breach of contract. And with respect to the Administrative Procedure Act.
But what happened is there’s a general claim that when the government regulates you and when it deals with you in one form or another, it has to treat you in a fair and impartial fashion. And it’s absolutely done nothing whatsoever about that. This can then be tied up, as Chuck Cooper likes to do it, by showing the specific obligations that are imposed upon a conservatorship, saying in effect under the APA, these
things obviously are the basis of all that goes forward. And so therefore, to the extent that you are not meeting those particular standards, you are vulnerable even if you didn’t think there was a constitutional case.
And the reason for bringing it as an APA case is that you hope that if you're going to find yourself in a situation where you get rational basis back of the hand on the constitutional claims, you will find that there’s a clarity in the statute which means that they will not apply Chevron deference.
My view about it is that the correlation coefficient between all three cases, common law type actions, administrative actions and constitutional actions are likely to prove very hard because in all cases, the ultimate argument is that this is a completely unbalanced transaction in which we give a penny and we take back $100 billion, and that cannot be regarded as a fair trade. It cannot be regarded as constitutionally other than as a taking. And it can’t be regarded as anything other than an administrative outrage. So I think in fact, the balance across these cases is the dominant theme, not the differences amongst them.
MR. TEDDY DOWNEY: Very interesting. And I think we’re out of audience questions, but I’ll throw one last out there and then maybe ask if you have anything to say that we haven’t covered. But from a legislative standpoint – not looking at sort of the comprehensive reform that they’re trying to look at - but Senators Corker and some of the other Senators have been adamant that no one but the taxpayer get any basic money out of Fannie and Freddie, with suggestions that they might try to codify the sweep or engage in some other sort of legislation that would prevent money going to anyone but the Treasury. How would passage of provisions like that complicate the court cases? Are those dangerous at all, or would they not affect the current litigation?
MR. RICHARD EPSTEIN: Well, I mean, first of all, to the extent that the claims are based upon past actions, the only way future legislation would alter them is if what they did was to undo the effect. And this is in effect only going to basically turn the screws one step closer. So if anything, what now happens is you've got more reasons to sue the government rather than less, if in fact the basic pattern of expropriation can be established. So if they’re trying to do this in order to legitimate what happened, I think what they do is they de-legitimate themselves and increase the liabilities running on the opposite risk.
The other thing I think which is very important is that one has to note the way in which the language that will benefit the taxpayer was actually introduced into FHFA. And this is something which is completely misunderstood and wholly ignored in the government’s briefs.
The way in which this is done is the FHFA was passed on the assumption that there would be a deal between the Treasury and Fannie and Freddie. But there was no understanding at the time that the deal would be between Fannie and Freddie through its conservator. It was thought it would be through its own people.
Now, at this particular point when you tell the government to act for the benefit of the taxpayer, you already have a party sitting on the other side of this transaction, the trustees who were supposed to have fiduciary duty.
So it’s an arm’s length deal. And what they’re trying to do is to make sure that the government does not get snookered by lending out a lot of money at a very low rate of interest which doesn’t cover the way in which the system breaks under the market. And that's an exactly correct way in which to do it. What you're saying is this is not a disguised bailout in the form of the creation of a senior preferred.
But what's happened now is they’re using the same thing to describe not only the position of the government, but the position of the conservator as well. So they’re saying the conservator has to act only for the benefit of the taxpayer. Well, that's crazy because you now no longer have the risk in this particular situation of the government letting this company off too cheaply. What you do is you have a systematic pattern of expropriation.
So one of the striking things about the government’s brief, both of them in fact, is they never bothered to give you the full statutory text in the thing so you could actually see what’s going on. You have to sort of download themselves and put it into it.
And every time they announce that this is solely for the benefit of the taxpayer, they think they get heroic points in the populous press, which I suspect they do. But I think in effect they hurt their own legal case because they basically are making it clear that they are deliberately avoiding the appropriate fiduciary duties, the appropriate obligations, that are associated with this kind of an interactive situation.
So this is common what happens. If you are a character who sits there and are sure that you don’t have a legal problem, then what you do is you kind get to be George Costanza. You boast about all the tough things that you've done to other people. But these are very dangerous strategies for government people to do. Because if in fact, they are held to account in court, the political posturing, which is very legion in this case, now becomes the potential source of additional risk in the same case. So that essentially becomes the sort of issue that they have to have. And I think it’s a part of a piece that neither the government in the defense of the case nor the Congressmen and the Senators who are lined up behind taxpayers get every dollar are aware of the fact that their case is much weaker than it turns out to be. They’re writing like they have a 95 percent chance or higher of winning this case, so why worry about the spillover from the political talk into the legal talk? That itself is a most unwise position because I think that the spillover is likely to be much, much heavier than they think.
So my view is if I were sitting out there in any of the forty suits that are doing this, I would get my legal stenographers together, and I would keep a record of all of these particular statements and turn it against them.
Let me give you an example. Do you like your health plan, Teddy? If so, you can keep it.
MR. TEDDY DOWNEY: That’s not a bad idea. So you're saying keep track of all the comments from Corker and others about giving money that’s taxpayers’ and using that in the court case?
MR. RICHARD EPSTEIN: Yeah, I mean, my view about it is what they’re doing is they’re making admissions that they don’t want the government to follow its fiduciary duties through the conservatorship. They can try and explain it away when they get into court, but they’ll sound as effective as Ezekiel Emanuel did when he tried to say what the President really meant is that if you want to pay extra to keep the current plan that you have, you're free to do so. And that's supposed to be under a health care system which is going to give you better care for less. It turns out what it’s going to give you is less care for more. Small deviation. And that's what's going on here.
MR. TEDDY DOWNEY: That’s very interesting. I actually had not considered that as a possibility. So that's fascinating. And I guess the last question just to wrap up, anything that we haven’t covered that you really think we should be focused on in the near-term here?
MR. RICHARD EPSTEIN: Yeah, I mean, look, one of the key features about this case that I’d like to expand upon a little bit is the distinction between the physical taking and the regulatory taking. It is characteristic of the government’s brief that what it does is it argues that the very broad standards for regulatory takings take over in this case. And let me see if you can think of what the examples ought to be and how they ought to be lined up. The most important cases for these first purposes of a financial taking is the Armstrong case from 1960 which I mentioned in which Justice Black makes the famous sentence which says that the takings clause is designed to prevent the government from forcing on a single individual all the losses that in all truth and justice ought to be borne by the public as a whole.
And in that particular case, what happened is the Navy went into Maine, and it asked for a boat to be repaired. The general contractor did not pay one of the subs. And the sub put what they call a materialman’s lien on the boat, saying in effect since you got the value of this lien and I can’t get paid by the general, you have to pay me off.
And what the government did is it dissolved the lien by sailing its boat out of Maine waters so it could no longer hold. And his position was quite simply this. You want this boat. There’s nothing which says that from this particular boat, this materialman, which represents .00001 percent of the population should bear three percent of the total loss. So what happened is the government can sail the boat out of the harbor. And it now becomes a general creditor instead of a secured borrower, right? I mean, it’s broken the lien, but it has to pay the amount. And that gets you to the right social result. And at that point, once it’s clear, they’re not going to sail the boat out of the harbor because they have no strategic advantage to do so. And in this particular case, what the government has really done is to say remember this preferred? Well, it had a value of X. And now what we’re doing is we’re making that value 10X. And we get that. Well, where do you get that? There’s no particular reason that you should do it.
So the correct way to look at this is not to say that there’s just a loss in value. It’s to say that the government put a lien higher than the ones that other parties have on the assets in question. And if they could do it here, then you could go up to any company and say, you know what? Here’s $10. By the way, we’re taking back, against your will, a preferred stock which will pay us this huge dividend and all your common stock goes down because of the change in the capital structure. This is not just a diminution in market value case. This is a radical change in the capital structure of the company.
And, you know, if I went to you and I said I know you own your home, Teddy. You're really a great guy. By the way, here’s $100. Now give me a lien on your premises, first lien on the house for $1,000. And not only would the equity holder, you, be in a position to object, but anyone who’s now a junior lienholder would be in a position to object as well. The government doesn’t talk about this. What the government does is it refers to a bunch of cases which are rightly understood as land use regulation cases. You look at this land and you want to use it for a tower, we think about all the aesthetic externalities it has for the rest of New York. And we therefore can decide that even without full compensation, some cases without compensation at all, in order to preserve the character of the neighborhood, we don’t have to pay you when we prevent you from building.
Even in that case, the Penn Central case, they didn’t actually take money from people or put a lien on the station. They just simply said you can’t use it in the way in which you would like. Now, from my view, the distinction between a restriction on use and the occupation of property is a constitutional non-starter. But in the real world, it is a constitutional imperative. And what the government keeps arguing is that this case is a general form of regulation and so it’s covered by the Penn Central case. One of its components is that if you do not have an investment backed expectation of keeping your wealth, the government can have it. And the government says, well, you know, the government always regulates private businesses, so you cannot have an investment backed expectation that you’ll be free from this particular imposition.
Now, there’s no question that you do take risk subject to the general law. So if they change the law with respect to mortgages and you happen to have company shares in a mortgage stock which is worth less, you can’t challenge it. But that's very different from having a specific lien on a particular piece of property put in violation of every known principle of contractual interpretation. And the government never when it talks about this case does anything other than reciting the three prongs of the Penn Central test and the deference that it does to explain why the lien analogy is not much more precise, given the fact that we are dealing with capital structures and not about aesthetic externalities.
MR. TEDDY DOWNEY: All right. Well, got a lot of things to keep an eye out for and look into. This has been extremely insightful, extraordinarily interesting and we can’t thank you enough for taking the time to do this.
MR. RICHARD EPSTEIN: My pleasure
.
MR. TEDDY DOWNEY: All right. Everyone have a good day. Thanks for joining us on the conference call.
MR. RICHARD EPSTEIN: Thank you all for listening if you're still there.
Wells Fargo loses bid to avoid lawsuit over FHA mortgage loans
http://finance.yahoo.com/news/wells-fargo-loses-bid-avoid-lawsuit-over-fha-151420814--finance.html
By Lawrence Hurley
WASHINGTON (Reuters) - A U.S. appeals court on Tuesday rejected Wells Fargo & Co's attempt to avoid litigation over government allegations of misconduct related to home mortgage loans issued by the Federal Housing Administration.
A unanimous three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit said the bank's participation in a $25 billion settlement with the government over foreclosure abuses did not address the claims in the separate civil case brought by the U.S. Attorney’s office in Manhattan concerning the origination and underwriting of loans.
Wells Fargo had asked a federal district court in Washington, D.C., to enforce the 2012 settlement, which had been negotiated by the Justice Department. The bank said the claims made in the more recent New York lawsuit should be barred in light of the settlement. The appeals court on Tuesday upheld a district judge's decision to deny the bank's motion.
The appeals court, in Tuesday's unsigned opinion, said the settlement language clearly allowed the separate claims to be made.
The case is United States v. Wells Fargo, U.S. Court of Appeals for the District of Columbia Circuit, No. 13-5112.
you are so far from reality. Please explain and share some insight as to why you feel it is perfectly legal and morally right for the government to take private property without compensation.
And by the way...the GSE's were NOT broke when put in to conservatorship.
Full Text of the Fifth Amendment
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Synopsis:
Indictment by a grand jury requires the decision of ordinary citizens to place one in danger of conviction. Double jeopardy means that when one has been convicted or acquitted, the government cannot place that person on trial again. The self-incrimination clause means that the prosecution must establish guilt by independent evidence and not by extorting a confession from the suspect, although voluntary confessions are not precluded. Due process of the law requires the government to observe proper and traditional methods in depriving one of an important right. Finally, when the government seizes property to use in the public interest, it must pay the owner fair value. Source: U.S. Senate
Explanation:
This amendment contains many important protections, including the right to grand jury indictments for capital crimes, the prohibition on double jeopardy, the ban on compelled self-incrimination in criminal cases, and the so-called “Takings Clause,” which says that private property can’t be “taken for public use without just compensation.” It also contains the fundamental guarantee that no person can be “deprived of life, liberty, or property, without due process of law.” But what is “due process?” Without this clause, the government could be able to force you to testify against yourself or deny you a fair trial all together. However, these rights come with a cost, and the government spends a lot of money and other resources to guarantee them.
Resources:
1. The Library of Congress Constitution Annotated. Contains a detailed history of the amendment, along with past and recent court cases. Here is a link to the section on the Fifth Amendment. Here are explanations from the LOC that are in an online-friendly format from FindLaw:
http://beta.congress.gov/content/conan/pdf/GPO-CONAN-2013-10-6.pdf
Quite an interesting read
read pages middle of 1556 down to 1566 or a few more if interested
Amendment XIV (1868)
Section 1. All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
Wouldn't it be more appropriate to consider any shareholder prior to the initiation of the net sweep? I believe the premise is that the treasury knowing allowed the stock to trade even as they decided they would not allow shareholders to profit in the form of dividends. I believe that took place in 2012...so my thinking is IF anyone should be allowed to profit, it would be all shareholders prior to the net sweep decision.
Personally, I believe if you bought stock yesterday you should be allowed to receive divs going forward.....if they are available.
A very good website to explore
http://www.plainsite.org/dockets/tzxnd2oa/district-of-columbia-district-court/fairholme-funds-inc-et-al-v-federal-housing-finance-agen/
scroll down and you get a bit more detail
at lest we didn't tank
Key Democrats Join to Say No to Housing Finance Overhaul
http://www.bloomberg.com/news/2014-05-08/key-democrats-join-to-say-no-to-housing-finance-overhaul.html?cmpid=yhoo
By Cheyenne Hopkins May 8, 2014 4:41 PM CT
Six Democrats whose support is crucial to a Senate plan to replace government-owned mortgage firms Fannie Mae (FNMA) and Freddie Mac (FMCC) have decided they will not support the proposal without major revisions, dimming its chances of becoming law.
The six senators held a private meeting today and agreed that they would not support the bipartisan bill, which would replace the finance companies with a government re-insurer, according to three people familiar with the meeting. A lack of Democratic consensus scuttled plans last week to approve the bill by the Senate Banking committee.
The six senators -- Charles Schumer of New York, Sherrod Brown of Ohio, Jeff Merkley of Oregon, Robert Menendez of New Jersey, Elizabeth Warren of Massachusetts, and Jack Reed of Rhode Island -- agreed that the structure of the re-insurer seemed unworkable and the bill lacked sufficient support for affordable housing goals.
The opposition of those six Democrats could make moving the housing bill to the floor difficult this year. Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo of Idaho, the top Republican on the panel, have the backing of six Democrats and six Republicans on the 22-member committee. However Senate Majority Leader Harry Reid has said the bill needs to attract more support from Democrats, who hold a slim majority in the chamber, before he will bring it to the Senate floor for a vote.
Broadening Support
“We know we have the votes to pass it out of committee,” Senator Bob Corker, a Tennessee Republican who helped draft an early version of the plan, said in an interview yesterday. “The question is, can we broaden support? I don’t think we can say yet how that’s going to work out.”
Isaac Boltansky, a policy analyst at Compass Point Research and Trading LLC in Washington, said the six Democrats’ support is crucial for advancing the bill.
“The Johnson-Crapo package will still likely clear the committee, but without any of the six targeted Democrats signing on it is highly doubtful that the measure will get a floor vote,” Boltansky said. The overhaul would be “effectively dead until 2015.”
The bill would create a Federal Mortgage Insurance Corporation to provide insurance for mortgage-backed securities. It also would allow banks to be an aggregator, guarantor, securitizer and lender of mortgages.
The bill relies on incentives to persuade financiers to lend to groups with higher risk profiles. Consumer and civil-rights advocates are pushing instead for a mandate that those groups be served.
In recent weeks, the bill’s supporters had courted Warren for her support, said two of the people. Warren has previously said that any housing measure needed to include explicit affordable housing goals, not just incentives.
Affordable Housing
“The affordable housing standards issue and the duty to serve I think are important,” Brown said at a Bloomberg breakfast last month. “I don’t think they’re addressed in the way they should be. I think there is increasing sentiment I hear from people from all over the financial services sector, from Wall Street to community banks to credit unions, that say, ‘How is this going to work?’”
Johnson postponed a committee vote on April 29 to provide more time to build Democratic support. He has said he was aiming to reconvene the panel next week.
The Johnson-Crapo bill would phase out Fannie Mae and Freddie Mac over a five-year period and replace them with federal insurance for mortgage bonds that would kick in only after private investors were wiped out. Current shareholders of Fannie Mae and Freddie Mac would be in line behind the U.S. government in getting any compensation from the wind-down.
The bill is based off a framework introduced last year by Corker and Mark Warner, a Democrat from Virginia.
“If we don’t get this right, we’ll create major disturbances in the housing market which will have a profound impact on families, on homeownership and certainly on our national economy,” Merkley said in an interview on April 29.
To contact the reporter on this story: Cheyenne Hopkins in Washington at chopkins19@bloomberg.net
Ralph Nader on Bloomberg Link
http://www.businessweek.com/videos/2014-04-16/nader-paulson-bernanke-deceived-shareholders
I think what these people do is swap scam shells with each other. I've done quite a bit of research and you can buy a clean, new, never been abused, fully reporting shell for well under $100k.
Sooooo my thinking is, they swap around these scam shells knowing people are sitting and watching and waiting for any chance to get out. That generates chatter on the message boards and draws in new meat willing to gamble on a chance for a multibagger.....toss in an occasional RS to clean up the OS and make room to reissue new shares.....toss out a few promo PR's on the cleanup of the "old" management team and the "new" direction of the company, to entice newbies to gamble a few hundred bucks at the table in hopes of catching the momo train early ...wash....rinse...repeat every few years.
Pleas explain why this will head north. A lot of people watch this board for any signs of life, and as of yet, there still seems to be a lack of information about this company. There is no plausible reason for this to increase in value...not a legal one anyway. Please provide the board with any relevant or current information.
TIA
Exactly...looks like they are grasping at anything to try to throw a negative view of FnF. I suppose when you have a quota of articles to submit...anything counts as journalism these days...lol
I think this reporter just skimmed info and comments from other articles as a filler for this. Notice the first paragraph.
"An organisation committed to winding down mortgage finance groups Fannie Mae and Freddie Mac launched on Monday with a call for the US government to respect investors’ rights as more groups push mortgage finance reform on to the agenda for the November midterm elections.
a complete 180 from what the 60 plus group's intentions are. And then she goes on to state how they are committed to helping FnF and the shareholders.
Pressure grows for Fannie Mae and Freddie Mac wind-down
By Gina Chon in Washington
http://www.ft.com/intl/cms/s/0/afcbfd88-bddd-11e3-83e5-00144feabdc0.html#axzz2yDGrDm7R
An organisation committed to winding down mortgage finance groups Fannie Mae and Freddie Mac launched on Monday with a call for the US government to respect investors’ rights as more groups push mortgage finance reform on to the agenda for the November midterm elections.
The Coalition for Mortgage Security, which includes former housing and urban development undersecretary Ken Blackwell as one of its directors, declined to provide information about its funding but echoed the views of several hedge funds fighting the government over the value of their shares.
Under the 2012 revised terms of the $188bn bailout of Fannie and Freddie, all of the income from the companies must go to the US government.
Bruce Berkowitz’s Fairholme Funds and other investment funds that are shareholders of the companies are suing the US government over those changes. The coalition said the government should “reverse course and abide by the original terms of the deal that respects the rights of investors, as well as property owners”.
“The rule of law is the basis for American capitalism and must be acknowledged and respected in order for properly functioning capital markets,” said the coalition, which is launching a national media campaign this week. “The rules of the game cannot be changed in the middle of an inning.”
There are several bills in Congress that would wind down Fannie and Freddie, but most of them do not address how investors would be paid. None of the bills may pass this year, but interested parties are still setting themselves up to be part of the debate next year.
Last Monday a conservative group called the 60 Plus Association launched a media campaign targeting senators who supported one of the bills eliminating Fannie and Freddie, saying investors need to be protected.
US senators on the banking committee are scheduled to vote at the end of this month on a bill sponsored by the top Democrat and Republican on the banking committee, Tim Johnson and Mike Crapo.
The 60 Plus group called the Johnson-Crapo bill the Obamacare of the mortgage industry, comparing the structures that would have to be formed to support the housing finance system to the contentious health insurance infrastructure created by US president Barack Obama.
The 60 Plus group is using advertisements to target Republicans Mr Crapo, Dean Heller, and Mark Kirk, as well as Democrats Mark Warner, Joe Manchin, Kay Hagan and others.
“We’re asking these senators to not bring Obamacare to the mortgage industry and to allow Fannie and Freddie shareholders to recoup the investments that are lawfully theirs,” said Jim Martin, chairman of 60 Plus.
The companies are one of the last remaining flashpoints of the 2008 financial crisis. But recently they made payments to the Treasury that now exceed their bailout amount, which has made some experts question whether they should be eliminated.
The Coalition for Mortgage Security said it wanted to see Fannie and Freddie replaced by private companies not given any special privileges, but it also sought to ensure the continuation of the 30-year fixed rated mortgage.
The group said it did not plan to take a position on any of the Fannie-Freddie bills in Congress. Instead, it was focused on protecting property rights and ensuring “Americans never again have to relive the 2008 housing crisis that forced millions of families from their homes”.
I wonder if the MM's are dusting off old stockpiles of worthless shares and trying to create a dumping opportunity for themselves.
approx. 25 mil traded after 2pm
Time & Sales
Price Size Mkt Time
$0.0003 100,000 OTO 15:59:54
$0.0003 777,000 OTO 15:53:50
$0.0002 123,000 OTO 15:53:47
$0.0003 90,000 OTO 15:51:56
$0.0003 10,000 OTO 15:45:14
$0.0003 10,000 OTO 15:42:21
$0.0003 50,000 OTO 15:38:18
$0.0003 1,000,000 OTO 15:33:24
$0.0003 1,000,000 OTO 15:33:17
$0.0003 31,250 OTO 15:30:59
$0.0003 1,000,000 OTO 15:30:57
$0.0003 50,000 OTO 15:30:51
$0.0002 89,582 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 215,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 500,000 OTO 15:28:42
$0.0002 7,010,413 OTO 15:25:06
$0.0002 1,542,700 OTO 15:24:48
$0.0002 1,446,887 OTO 15:24:45
$0.0002 140,000 OTO 15:24:18
$0.0002 5,000,000 OTO 15:24:14
$0.0002 2,000,000 OTO 15:22:39
$0.0002 1,250,000 OTO 15:05:33
$0.0002 900,000 OTO 14:19:30
Feds Investigate GM For Bankruptcy Fraud, Ignore Own Behavior On Fannie And Freddie
http://www.forbes.com/sites/jeffreydorfman/2014/03/27/feds-investigate-gm-for-bankruptcy-fraud-ignore-own-behavior-on-fannie-and-freddie/?partner=yahootix
The federal government is apparently investigating General Motors GM +0.32% to see if during its 2009 bankruptcy GM hid knowledge of ignition problems which recently spurred an enormous recall. This is a rather surprising case for the federal government to pursue both because of the absence of an obvious remedy and due to the federal government itself having perpetrated more serious fraud than this in roughly the same time period upon investors in Fannie Mae and Freddie Mac .
While it is becoming clearer that at least some at GM knew about this problem prior to the bankruptcy, the current GM is not the same company as the “old” GM that went through bankruptcy. Theoretically, parties will have to sue the old company, which has no worthwhile assets, and one would think the Feds would have to try to punish the old company, as well, for acts undertaken while it was the only GM around. Further, if GM had admitted to ignition problems during the bankruptcy, it assumedly could have placed at least some of the costs and liabilities associated with these problems into the old GM that was going bankrupt, thereby insulating the currently operating company from some financial risk.
Thus, it is a little perplexing to imagine what GM gained by the supposed subterfuge and how anyone is going to collect damages or penalties. In California, some class action lawyers are trying in federal court to go after new GM on these issues, but we will have to wait and see if a judge allows that approach.
If new GM can be sued, what is the case? Creditors of the old GM would have received even less if additional liabilities had been disclosed, so they were not defrauded. People who had serious adverse incidents due to the specific ignition issue certainly appear to have cases against GM, but the new GM has done nothing to imply they are unwilling to address those cases. If the new GM tells these people, sorry all the money from old GM is gone and we are not going to pay you, then a bankruptcy fraud would emerge (from the act of hiding from somebody that they are a creditor who should be trying to collect money from the bankrupt company’s limited assets).
Thus, it appears to me that if GM lied in its 2009 bankruptcy case, concealing material information from creditors and investors, the damage is unclear until we learn how GM is going to respond now that the information is out in the open.
The contrast to the federal government’s own behavior vis-à-vis Fannie and Freddie is eye opening.
The Obama administration placed Fannie Mae and Freddie Mac into conservatorship during the depths of the mortgage market meltdown as they suffered billions of dollars in losses on subprime mortgage securities. In 2010 the federal government hatched a secret plan to keep Fannie and Freddie’s future profits forever, even if the government ever recouped all the money it spent to bail them out. Since then, the government, through the FDIC, has three times sold stock in Fannie and Freddie to the public. In none of those cases did the government inform investors that shareholders would never see any profits if they bought the stock from the government. This seems like about a big a fraud as one could commit.
To sell stock, a company (in this case the FDIC) must provide investors and the Securities and Exchange Commission with considerable financial and risk disclosure so that investors can make informed decisions. These details must be truthful and complete or the company risks civil and criminal prosecution.
In complete opposition to such behavior, the federal government sold stock in a company that it believed to have no future earning potential and told nobody. At the time shares in Fannie and Freddie were rising as investors glimpsed some hope that the companies would regain solid financial ground and the government would restore them to their prior status.
It was not until 2012 that the federal government revealed what is now known as the Third Amendment, informing the public that the government planned to keep all of Fannie and Freddie’s earnings forever rather than to let future earnings flow to shareholders after the taxpayers were made whole.
This fraud encouraged buyers to pay higher prices for some of the shares in Freddie and Fannie that the government acquired in exchange for its bailout. This recovery of taxpayer money was accomplished at the expense of investors who trusted the disclosures they received from the FDIC, Fannie, and Freddie, disclosures that the government knew to be untrue. Potentially making matters worse, the Obama administration and Congress may now move forward with a bipartisan plan to eliminate Fannie and Freddie completely, meaning the investors who bought stock from the government in these entities will lose their entire investments.
As reported by the New York Times on March 21, the federal probe of GM’s behavior hinges on “whether company officials failed to tell the government and the public something that it knew to be true.” If that is the standard for fraud investigations these days, one must wonder: where is the investigation into the federal government’s own behavior? We have much more evidence that the federal government failed to disclose relevant information than we do GM.
The federal government’s plan was known by Treasury Secretary Geithner, according to some more New York Times reporting, which is only one step below the top and certainly high enough up to make a securities fraud case open and shut from a layman’s eyes. We do not know yet who knew what when at GM. However, we do know a lot about the government’s opinion of its need to follow the rules. This is made clear by the fact that the investigation into GM’s behavior is moving ahead while nothing appears to be happening in terms of investigating the government itself.
A government that does not follow the law is simply a dictator, in our case a giant bureaucratic monarch. If the government expects the people to obey the law, the least it can do is the same.
incorrect...there is only ONE way to keep your shares from truly being used to short, and that isn't it. You can tell your broker you do not wish to allow your shares to be shorted, and they are SUPPOSED to abide by your request, but one would be hard pressed to prove they didn't follow your request. Just because a person puts a sell order in at a ridiculously high price, doesn't prevent those shares as being used to short. Keep in mind a broker has at minimum 13 days to come up with the shares if a short position is called. It has been known that some brokers will "lose" or "misdirect" those streetname shares in the pool and buy a few more days to allow the short position to be covered. that kind of stuff typically happens with NSS, but to say it is limited to NSS wouldn't be a wise determination.
Back to the ONLY 100% way to prevent one's shares from being used to short. Hold the physical cert for your shares.
Margaret M. Sweeney
Chambers Phone: (202) 357-6644
Judge Sweeney was appointed a Judge of the United States Court of Federal Claims by President George W. Bush on October 24, 2005, and entered duty on December 14, 2005. She graduated from Notre Dame of Maryland, receiving a B.A. degree in history in 1977, and from Delaware Law School, receiving a J.D. degree in 1981.
Judge Sweeney formerly was a Special Master for the United States Court of Federal Claims (2003 - 2005). Prior to that appointment, Judge Sweeney served as an Attorney Advisor for the United States Department of Justice Office of Intelligence Policy and Review (1999 - 2003). In that position, she prepared applications and motions on behalf of various United States intelligence agencies for presentation to the Foreign Intelligence Surveillance Court. Prior to joining the Office of Intelligence Policy and Review, Judge Sweeney served as a Trial Attorney in the General Litigation Section of the Environment and Natural Resources Division of the United States Department of Justice (1987 - 1999). From 1985 to 1987, she served as law clerk to the Honorable Loren A. Smith, Chief Judge of the United States Court of Federal Claims. Judge Sweeney was a litigation associate from 1983 to 1985, with the firm of Fedorko, Gilbert, & Lanctot, Morrisville, Pennsylvania, handling civil and criminal cases, including commercial litigation, personal injury, domestic relations, real property and estates. Judge Sweeney also served as a Delaware Family Court Master presiding over cases involving domestic relations matters (1981 - 1983).
Judge Sweeney is a member of the bars of the Supreme Court of Pennsylvania and the District of Columbia Court of Appeals. In 1999, she served as President of the United States Court of Federal Claims Bar Association.
Judge Sweeney and her family reside in the Washington metropolitan area.
Fairholme in Another Victory Over Treasury/FHFA (Court of Federal Claims)
Posted by ToddSullivan
on March 19th, 2014
http://www.valueplays.net/2014/03/19/fairholme-another-victory-treasuryfhfa-court-federal-claims/
Judge Sweeney is not messing around with this litigation……it is going forward..
On 2/26 Sweeney granted $FAIRX discovery in their case vs Treasury/FHFA re: $FNMA
On, on 3/17 defendants filed a motion to stay discovery stating : “…requests that the Court stay its February 26, 2014 order (Order) pending resolution of the dispositive issues in the Government’s motion to dismiss with respect to which there is undisputedly no need for discovery. In the alternative, the United States respectfully asks the Court to reconsider and vacate the Order because discovery prior to resolution of the motion to dismiss is inappropriate.”
I’m gonna go out on a limb and guess there isn’t much judges dislike more than being told their ruling is “inappropriate” and that the reasoning is “there is undisputedly no need for discovery”. That basically translates to gov’t lawyers telling Judge Sweeney, “you don’t know what your are doing”.
Here is their motion (I’ve marked it up w/notes):
Motion to Stay
On 3/19 here was Sweeney’s response:
For those who can’t see it she said : Denied, get your ass (or something to that effect) in court 3/21
Being in or out of C-ship will not determine the end value of this stock. Removal of C-ship may boost it some, but the determining factor for the value of this stock lies completely with the MONEY.
Who gets it?
If the FED wins and they get to keep the money, continue to rake total profits from the GSE's, then yeah...we are toast. BUT...if the rulings are in our favor, that alone can drive the pps to double digit dollars. I expect the rulings to be much more in favor of the shareholders than the FED.
Do you really think these large funds that have gone public with their investments in the GSE's didn't spend a few dollars on a couple dozen lawyers, strategists, economists, and quite possibly some lobbyists to boot. I would be willing to bet THEIR DD is a touch better than OUR DD. Mock trials to cover all angles...all plausible scenarios...even the absurd scenarios.
I was in this long before they were, but them being in it does lend a bit of confidence that things will turn out better for the shareholders than not.
Here ya go...this is what it should say
Pilgrim Petroleum Announces Year-End Letter to Shareholders
IRVING, Texas -- Pilgrim Petroleum (PINK SHEETS: PGPM) (FWB: PHV) issued a letter to shareholders today, providing an update on the company's progress. The letter reads as follows:
To Our Valued Shareholders:
Pilgrim Petroleum's performance in the last few years has provided strong confirmation of our company's ability to grow, maintain and increase financial and operational performance for the sole benefit of its officers and directors. All of us at Pilgrim Petroleum recognize that raising shareholder value was our collective challenge. We strived to ensure shareholders were baited with positive sounding ideas that in theory could work, but in reality we had no intention of ever following through on them. Our real goal was to entice new investors into believing we really cared about the shareholders. Our Plan of Operations, our strategic goals for the company was to hopefully bring in new unsuspecing investors that could easily be convinced to buy into our forward looking ideas that would eventually benefit only us. Good operating results, combined with no debt in our balance sheet, contributed to our ability to aggressively focus on the growth of our personal portfolio's, while at all times keeping the shareholders totally and completely in the dark. We mentioned phantom business ideas....apparitions....thoughts and plans that would never come to fruition in our strategic goal of making a living off the unsuspecting investor. As our window of opportunity to find new and innovative ways to fleece the unsuspecting investor grew smaller, we at times went completely dormant. We willfully posted no information of any kind for months...even years on end.
The key to our strategic plan is as follows: at some point, early investors will have long written us off and moved on to real companies that actually do something. Companies that have a real product or service. We can and will monitor message boards and stock chat rooms for any hint of past remembrances. Once we feel most of the early investors have moved on or forgotten about us, we will slowly and quietly begin another round of hopeless and empty promises to a new group of unsuspecting investors. We as of yet do not know what our next phantom business venture will be, but we plan to make it a real doozy...after all....Daddy needs a new set of golf clubs, and a new BMW to haul them around in.
Very informative website. Gives you the stats on all companies that received a FED bailout.
https://projects.propublica.org/bailout/list
OMB Projects Bigger Returns on Fannie and Freddie
http://blogs.wsj.com/washwire/2014/03/10/omb-projects-bigger-returns-on-fannie-and-freddie/?mod=yahoo_hs
By
Nick Timiraos
Fannie Mae headquarters is seen in Washington in this file photo from Nov. 7, 2013. (REUTERS/Gary Cameron/Files) —Reuters
Fannie MaeFNMA +4.88% and Freddie MacFMCC +4.27% would return nearly twice the amount of money they received from the U.S. Treasury if the current bailout arrangement isn’t changed over the next decade, according to the White House budget office.
By the end of March, the two mortgage-finance companies that were seized by the U.S. in 2008 will have returned $202.9 billion in dividend payments, after receiving $187.5 billion in federal support between 2008 and 2011. The budget projections released Monday by the White House Office of Management and Budget show that the companies could return an additional $163.8 billion through the 2024 fiscal year if the bailout arrangement remains in place.
By that tally, Fannie and Freddie would return $179.2 billion more to taxpayers than they were required to borrow. Last year, the budget showed that taxpayers faced a net gain of $51 billion through 2023.
Even though both companies will have soon sent more in dividends to the Treasury than the amounts they borrow, those dividends don’t reduce the $187.5 billion in stock held by the Treasury. The terms of their government support don’t provide a clear mechanism for them to redeem those shares, and the companies are currently required to send all of their profits to the Treasury as dividend payments.
The Treasury faces lawsuits from nearly 20 investors challenging the dividend terms, which were modified in 2012. They say the government’s collection of the firms’ entire profits amounts to an unconstitutional appropriation of assets and that the Treasury and the firms’ federal regulator engaged in illegal self-dealing when it made those changes. The government has filed motions to dismiss the suits, which they say are without merit.
Many of the aggrieved investors bought Fannie and Freddie stock—particularly the preferred shares, which was a form of senior equity—after the government bailout. The initial terms required Fannie and Freddie to pay a 10% dividend on the shares that the government held, and many investors bet that the companies would ultimately become profitable enough to make money even after paying those dividends.
In 2012, however, the government changed the terms and upended those bets by requiring all profits to be paid out as dividends to the government and eliminating the prospect that the companies would have any residual earnings for those shareholders.
Still, shares of Fannie and Freddie are trading more than 1600% above their levels of a year ago and in the past week touched levels last seen before they were seized by the U.S. in 2008.
Senate lawmakers are working to introduce bipartisan legislation that would overhaul the firms, but many analysts assign low odds to the prospect that a bill would pass Congress this year.
Some lawmakers have said taxpayers are entitled to generous returns because the government agreed to accept nearly unlimited losses during the crisis, nursing the companies back to health. “I was a venture capitalist for a lot longer than I’ve been a politician. If I had put $180 billion into Fannie and Freddie back in 2009, I’d expect more than a 1 to 1 return on that,” said Sen. Mark Warner (D., Va.) at a conference last fall. “So once I got a 30-to-1 return…talk to me about Fannie and Freddie making money.”
Absent a change in the Treasury’s support or a court ruling that forces the Treasury to revisit the current terms, the companies can’t keep most of their earnings, meaning that, unlike other bailed-out firms such as General Motors Co.GM -2.06% or American International Group Inc.AIG -0.60%, they won’t be returned to private control on their own.
Monday’s projections represent a simple snapshot based on a series of assumptions that are highly sensitive to changes in the economy and financial markets.
Westhus Reaping Fannie Windfall to Rival Big Short: Mortgages
http://www.bloomberg.com/news/2014-03-10/westhus-reaping-fannie-windfall-to-rival-big-short-mortgages.html?cmpid=yhoo
By Jody Shenn Mar 9, 2014 11:00 PM CT
Todd T. Westhus is poised to join George Soros and John Paulson with an unlikely wager.
Soros broke the Bank of England in 1992 by betting on the devaluation of the British pound, netting $1 billion. Paulson took home $15 billion, anticipating the collapse of subprime debt that contributed to the financial crisis. Now, Westhus is trying to transform the $9.4 trillion U.S. mortgage market. The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar. Back then, the mortgage giants were just about given up for dead. Today, the companies are profitable and their shares have soared 24-fold.
Taxpayers rescued Fannie Mae (FNMA) and Freddie Mac in 2008 with a bailout that swelled to $187.5 billion, an amount the companies will finish sending back to the government this month. The issue for investors is that the Treasury Department decided in 2012 to keep all the companies’ profits. Perry sued the U.S. in July, saying the money sweep flouts the rule of law. Senator Bob Corker, a member of the Senate Banking Committee, said the firms’ staunchest supporter should be rewarded.
The companies would “be generating not one dime of revenue if it weren’t for the federal government,” Corker, a Tennessee Republican, said in an interview.
Almost six years after bad home loans crippled the economy, Perry and other investment firms are battling a government that can’t agree on a fresh path forward. At stake is the future of housing, which contributed more than 15 percent of America’s economic activity last year, and the survival of Fannie Mae and Freddie Mac, which together guaranteed about 60 percent of new home loans in 2013.
Biggest Paydays
For the investors, it’s also one of the biggest potential paydays in history.
On the line is at least $33 billion in preferred shares, securities meant to be compensated before owners of common stock in the event of a bankruptcy. That’s an amount greater than the annual funding for the National Institutes of Health. The money could be fully repaid or wiped out, depending on the outcome of lawsuits and political jockeying.
There are greater rewards in the companies’ common shares. Fannie Mae’s stock has risen 1,800 percent since February 2013 and Bill Ackman of Pershing Square Capital Management LP said last month it could go up another 10-fold.
‘Distressed Trade’
“It’s the biggest distressed trade in history,” said David Ford, co-founder of Latigo Partners LP, a $450 million event-driven credit hedge-fund firm based in New York. Ford first bought the preferred shares in 2011 when they traded at 4 cents on the dollar and started acquiring the common shares last year.
“We very much believe in the investment,” said Ford.
Fannie Mae, created by Congress during the Great Depression of the 1930s, and Freddie Mac, established in 1970 to compete with its older sister, keep money flowing through the U.S. home-loan machine by guaranteeing securities that lenders sell for the cash they can use to make more loans.
For decades, “the agencies” existed as hybrids, part publicly held companies, part extensions of government policy. They operated as private companies, selling shares to the public. Because investors believed they had the support of the U.S. government if they ever got into trouble, their borrowing costs were lower than those of other financial companies. After the companies nearly collapsed in September 2008 due to surging defaults of the mortgages they guaranteed, the implicit government support became explicit.
$500 Million
Perry, which manages $10 billion, now has about $500 million riding on the preferred shares, even after several rounds of sales, according to a person familiar with the investments. It also has a smaller stake in the common equity, the person said. Robert Terra, a spokesman for Perry at Hamilton Place Strategies, declined to comment and said its officials wouldn’t discuss the investment.
Fund managers who have invested in the preferred shares include Paulson, famous for his successful 2007 wager that U.S. subprime homeowners would quit paying their mortgages; Jeffrey Altman of Owl Creek Asset Management LP, one of last year’s best-performing hedge-fund firms; and Bruce Berkowitz, the slick-haired mutual-fund star who runs Fairholme (FAIRX) Fund.
Ralph Nader
Units of private-equity firms Blackstone Group LP and Carlyle Group LP were invested in the shares last year, according to people with knowledge of their investments, while hedge fund Marathon Asset Management LP Chief Executive Officer Bruce Richards said on Bloomberg Television last month that he sees betting on the companies as the best opportunity out there. Ackman’s Pershing Square and even Ralph Nader, the consumer activist and five-time U.S. presidential candidate, have said they own the firms’ even-riskier common shares.
Perry was ahead of the wave, thanks to Westhus. The hedge fund stuck to the trade even after rivals such as Kyle Bass of Dallas-based Hayman Capital Management LP said it was too risky to wager on government policy and sold his shares in 2012.
Westhus grew up in Massachusetts and competed on the Duke University swim team. He joined Perry in 2006 as an analyst from hedge fund Avenue Capital Group LLC, which invests in the debt of companies in trouble. He’d previously worked as a junior member of investment banking teams involved in company financing at Morgan Stanley and JPMorgan Chase & Co., according to a person familiar with his work history. He helped Perry profit by almost $2 billion betting against the performance of subprime home loans before the 2008 financial crisis.
Contrarian Strategy
Investments in Fannie Mae and Freddie Mac reflected the fund’s contrarian strategy. At the time, home-loan delinquencies had more than doubled, according to the Mortgage Bankers Association. Members of an investigatory panel created by Congress were discussing the companies only to argue about how much blame to assign them for the crisis.
Five months after Perry began buying Fannie Mae and Freddie Mac securities, Westhus visited a Treasury Department official to talk about the two companies, according to public records.
Fund founder Richard Perry, who has supported Democratic candidates, also met with policy makers to urge the survival of the mortgage companies, according to a person familiar with the discussions. Perry, who started the fund in 1988, is a Goldman Sachs Group Inc. alumnus and the nephew of former Bear Stearns Cos. Chief Executive Officer Jimmy Cayne.
Pressing Case
Perry brought on Julie Chon, a former senior policy adviser on the Senate Banking Committee, in 2012, who helped press Perry’s case in Washington. The firm failed to sway policymakers.
To take the case to court, Perry signed up former U.S. Solicitor General Theodore Olson, a partner at the Washington law firm Gibson Dunn & Crutcher LLP. Olson brought on Tony Fratto, a former spokesman for President George W. Bush, to spread the word about the merits of the case in the press.
The court clash between the U.S. and Perry, one of at least 18 legal skirmishes involving the two mortgage companies, is part of an effort that may determine how the country will finance home loans in the future.
The latest version of what might be called the Perry plan would start with the companies’ survival. Fannie Mae and Freddie Mac would keep profits rather than send them to the Treasury. It would also prohibit the companies from owning mortgages or bonds and create competition by setting up a common platform for turning home loans into securities, establishing an industry-funded reinsurer and raising the amount of capital the companies would be required to hold.
Berkowitz Proposal
Berkowitz proposed in November that his Fairholme Fund and other investors buy two businesses that insure mortgage-backed securities from Fannie Mae and Freddie Mac, in exchange for the preferred stock held by investors and at least $17.3 billion in new capital. In a Feb. 28 letters to the mortgage companies, he asked the boards of directors of the two companies to suspend payments to the Treasury until they “evaluate strategic and restructuring options” with the help of independent legal and financial advisers. Fairholme owns more than 20 million shares of common stock and more than 66 million of preferred shares.
Corker bristles at the idea that hedge funds will dictate government policy. He wrote legislation with Democratic Senator Mark Warner of Virginia that calls for the companies to go away. They’d be replaced by a new government-owned mortgage insurer modeled after the Federal Deposit Insurance Corp. It would charge for mortgage-backed securities guarantees that kick in after private capital absorbs the first 10 percent of losses. The heads of the Senate’s banking panel are working to turn the proposal into their own bill with input from the White House.
Lawmakers’ Warnings
Policymakers from both political parties, including former Treasury Secretaries Lawrence Summers, a Democrat, and Henry Paulson, a Republican, join Corker in warning that fund managers may undercut efforts to do away with a duopoly that used an implied government guarantee to benefit private shareholders and is too big to be allowed to fail.
Reviving the companies is “just not, to me, what’s in the public interest, and people have hired me to look after the public interest,” Corker said.
Doing what’s right by shareholders, even by keeping the firms alive, won’t prevent lawmakers from overhauling the system, according to Matthew D. McGill, a partner at Gibson Dunn who’s working on Perry’s case.
‘Smoke Screen’
“People are using the political unpopularity of hedge funds to blow a smoke screen,” he said. “Congress could enact all kinds of laws to change the business models. It could change their names, it could change their ownership structure, it could remove their government charters, it could subject them to any matter of taxation. There’s all kinds of things that Congress could do on a going forward basis.” The money sweep, the focus of Perry’s legal complaint, “literally has nothing to do with that,” he said.
The conflict is playing out in public forums. Olson said last month at an event in Washington organized by Nader that the government was acting like Argentina, Russia or Cuba by stripping Perry and other investors of their money.
David Stevens, president of the Mortgage Bankers Association industry group who was Federal Housing Agency commissioner until 2011, derided investors pursuing their self-interest. The Federal Reserve’s policy of buying Fannie Mae and Freddie Mac mortgage securities to stimulate the economy has boosted investor profits, he said.
“The shareholders are all about the shareholders,” Stevens said. “Everybody else cares about getting the system right.”
Fixing System
The demands of hedge funds don’t need to disrupt the rebuilding of the system, according to Adam LaVier, a former Treasury official and now a managing director at Millstein & Co. LP, a financial advisory firm in Washington.
“Over the course of this debate, Fannie and Freddie will have generated at least $250 billion to $300 billion in earnings, far in excess of the $187 billion that Treasury invested in them,” LaVier said. “Are you going to tell me you can’t redeem the $33 billion of junior preferred, repay Treasury in full plus a significant profit, and fix the system?”
Perry faces a “big hurdle” in court because the law governing the government’s conservatorships bar most types of lawsuits, said Patrick J. Smith, a partner at Ivins, Phillips & Barker in Washington. Nader said in an interview he thought Perry’s case was the strongest. The government changed the rules “midstream” after the bailout, Nader said.
The preferred shares owned by Fairholme, Perry and the rest will probably end up worthless unless they get help in court, analysts such as Ed Mills at FBR Capital Markets & Co. predict.
Congressional Decision
A Congressional decision on the future of government’s role in real estate finance will probably not come anytime soon, and that could weigh on the value of shares not paying dividends. Observers including Laurie Goodman, the former mortgage-bond analyst who now heads the Urban Institute’s Housing Finance Policy Center, say legislation to remake the system most likely won’t be enacted until President Barack Obama’s successor takes office in 2017.
Perry representatives wouldn’t comment on how much they’ve already made from the preferred shares.
While the debate rages, investors will have to content themselves with trading preferred shares that may or may not have any value in the future, Corker said.
“With where it’s trading right now,” he said, “I’d be getting out with a handsome profit.”
This is an outstanding link to information during the initial entry into conservatorship
quite a few links to pdf's and such
http://www.fhfa.gov/webfiles/1099/conservatorship21709.pdf
I saw it too....lets hope that becomes a cheapie in the next week....lol
When did it touch %5.30....my L2 was scrolling so darn fast I missed it