Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
BEEN HERE FOR YEARS TOO JUST DOING SOME COMMENTARY WATCHING PRICE ACTION, THIS IS A NO BRAINIER INTO AUGUST 4TH EARNINGS.
SHORT SQUEEZE ALERT!! With 4.71 million shares average volume, it will take short sellers 6 days to cover their FNMA’s short positions.
THIS IS UNBELIEVABLE ACTIVITY WE ARE SEEING THIS COULD TEST $2.15
WOW!! HUGE BUYS COMING IN!
Yep excellent opportunity here to get in on the cheap.
We may be just one inch away from going into bullish breakout mode in this security. The voices of the bulls are louder now and the bears are in retreat.
Yes hopefully we test $2.10 tomorrow.
Counsel for Treasury has consulted with counsel for class plaintiffs and counsel for FHFA. Neither opposes this motion. Accordingly, Treasury requests that
the Court enter the following briefing schedule:
Brief for Class Plaintiffs: July 6, 2016
Joint Brief for FHFA, et al.: July 13, 2016
Brief for Treasury: July 13, 2016
Reply Brief for Class Plaintiffs: July 20, 2016
SHORT SQUEEEEEEEEEEZE
With 4.71 million shares average volume, it will take short sellers 7 days to cover their FNMA’s short positions.
Yep agreed with that.
"Net income/outstanding shares * P/E multiple==PPS
thus 11/1.16*40===PPS of $379.00 "
How far into the future are you talking for the $379 price target on FNMA?
This is going to be crazy. This could be a 100-bagger from here in my lifetime. I do not know how I missed this. The truth is that if this went the other way, the stock would be worth $20-$50. This way is so much better for the commons!
Ackman's valuation with the warrants in play is $20-$50. If you back out the 80% dilution, you quickly get to $100-$250. Odds are that they will be recapitalized by way of some sort of dilutive offering on their way out of the gate instead of through earnings, but the monster upside is inescapable.
Seeking Alpha
FannieGate In Court Of Appeals: Analysis Of Upcoming Court Decision
Jul. 13, 2016 11:05 AM ET|
5 comments |
About: Freddie Mac (FMCC), FNMA
Jeremy Cain
Jeremy Cain
Follow
(40 followers)
Deep value, special situations, activist investor, alternative energy
Send Message
Summary
The purpose of this article is to provide an in-depth analysis of the upcoming decision in the Perry Capital et al. lawsuit before the Court of Appeals (D.C. Circuit).
It will analyze multiple aspects of the oral arguments and complaints to provide an opinion of the outcome.
Accompanying excursus articles assist in the decision analysis, as well as provide insight into the strengths of the plaintiffs’ claims and weaknesses of the defense.
After a thorough analysis, I estimate that it is highly probable (71-84%) that the Court of Appeals will overturn Judge Lamberth’s ruling that denied plaintiffs’ claims.
The panel will send the case back to District Court and order an administrative record to be produced along with the case to proceed for damages to plaintiffs.
Introduction:
This is a rather lenghty examination of the oral arguments in a GSE investor lawsuit Perry Capital et al. vs. Jacob J. Lew et al. It is a significant case for the Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) shareholders (as well as the rule of law and capital markets), and investors need to pay close attention to the outcome, as explained later. This article will first examine the case from a technical manner. Then an in-depth look at how the oral arguments proceeded will be done. Next a brief estimate of how each judge will rule and overall judgement will be given along. Finally, concluding remarks and the relevance of the case to investors will be discussed.
Technical Analysis:
Although tedious and somewhat unglamorous, insight can be gained by looking at the oral arguments from a technical perspective. Oral arguments were scheduled for 1 hour. Each lawyer [Olson, Hume, Cayne (FHFA) and Stern (Treasury)] was scheduled for 15 minutes, followed by a rebuttal of 3 minutes for plaintiffs. However, the oral arguments lasted 2 hours, 37 minutes and 9 seconds (excluding the 7 minute break between plaintiffs and defense arguments), including a 15:30 rebuttal session by plaintiffs. The order of arguments and associated times before the panel was the following: Ted Olson (43:02), Hamish Hume (28:01), Howard Cayne (41:54) and Mark Stern (27:45). This was followed by rebuttal arguments of Ted Olson (7:25) and Hamish Hume (7:59).
Figures 1-3 are useful to look at the oral arguments from a technical perspective. Key points are summarized at the end of this section. Figure 1 shows the temporal flow of arguments for each of the four attorneys. It is a snapshot of who talked for how long over the course of each attorney's argument. They are divided into engagements (attorney presenting argument or responding to a question from judge, judge asking question or making statement, etc.) in a continual argument sense (in order to minimize counting back and forth banter as engagements). Ted Olson (panel c) and Howard Cayne (panel a) presented cases of approximately equal length (~ 42 min), while Mark Stern (panel b) and Hamish Hume (panel d) also presented cases of approximately the same time (~ 28 min). Figure 1 shows that Olson's argument had 44% more engagements than Cayne and ~ 54% more than Hume and Stern, while Hume had ~ 17% more than Stern. Olson's oral argument was the most engaging with the panel of judges, as shown in Figures 1 and 2. Figure 2a shows that Olson spoke only 55% of the time in the oral arguments, while Judges Ginsburg and Millett spoke about the same amount of time (~ 19% and 22%, respectively). The other attorneys spoke much more (77-83%) in their oral arguments. Judge Millett dominated the panel discussion with Hamish Hume, while Ginsburg engaged the most with Mark Stern (Treasury). Judges Millett and Ginsberg engaged Howard Cayne approximately the same amount of time.
(click to enlarge)
Figure 1: Temporal flow of oral arguments of plaintiffs (lower panels: c, d) and defense (upper panels: a, b). Time of each engagement for attorneys and panel (color scheme) is shown on left while overall time of argument is displayed (grey line) on right.
(click to enlarge)
Figure 2: [a] Percentage of time in each oral argument spent by the presenting attorney and judges. Average time between engagement for each attorney and judge for the four different oral arguments (colors).
Figure 2 also shows (panel b) the average amount of time that each attorney spent speaking before engaging one of the justices and vice-versa, as well as the average time between a question/objection being raised by a justice or answered by an attorney. As Figure 2a suggests, Judge Ginsberg engaged Stern (55 s) and Olson (63 s) more frequently than Hume (111 s) and Cayne (129 s). However, Judge Millett engaged the plaintiffs much more frequently than the defense: Olson (78 s), Hume (59 s), Cayne (237 s) and Stern (332 s). As expected, the plaintiffs talked (on average) less between answering questions or objections by the judges: Olson (33 s), Hume (38 s), Cayne (84 s), Stern (47 s).
The plots shown in Figure 3 also provide insight. The left panel shows a distribution of the engagement time (length of time spoken) by each attorney in his oral argument. The distribution is divided up into 15 s intervals. Each attorney has the highest count at the lowest amount of engagement time and drops off significantly as time increases. Two things worth noting are: 1) Olson has by far the highest count in the lowest frequency bins, 2) Cayne and Stern had many more long engagements than Olson and Hume. This is reflected in the cumulative distribution (right panel) of Figure 3. Excluding Ted Olson's opening remarks, everything that he said (80% of total) was under 1 minute. Contrast that with the arguments of Hamish Hume: only 35% that he said was under 1 minute, and 80% was under 2:30. Mark Stern's distribution was slightly wider than Hume's: 50% was under 1 minute but 75% was under 2:45. Cayne's distribution was by far the widest: 50% was below 3:45 and 80% was under 5:45.
(click to enlarge)
Figure 3: [a] Distribution of speaking times and cumulative distribution of engagement times for each attorney (color).
Key takeaway points from Figures 1 - 3 and general observations are the following:
Ted Olson's argument was the closest to a back and forth conversation with the panel of judges. Some would point to this as a clear indication of scrutiny that he experienced. There is no doubt that Olson received the most intense dialog with the panel, and Millett was annoyed with his answers to her hypothetical questions. However, the judges were intense in their questioning of Hume also, and leveled some rather damning remarks against the defense attorneys as well.
Judge Millett was much more subdued in her questioning of the defense attorneys than the plaintiffs. The same is true of Judge Ginsburg, although he was the most consistent in asking questions of each attorney. Both judges asked difficult questions to the plaintiffs, and only Ginsburg pressed the defense. I definitely do not think that it was fair; they should have been tougher on Cayne and Stern). However, there is evidence to suggest that the defense really didn't generate much interest from the judges like the plaintiffs did.
Cayne and Stern were able to speak on multiple occasions for lengthy periods of time before being interrupted by the panel. Hume was able to do this on much less frequently but Olson was not. As previously said, this doesn't necessarily mean that the judges received the defense arguments better than the plaintiffs', but that they engaged more with Olson and Hume on the substance of the case.
Judge Brown is somewhat of a dark horse in trying to determine which direction she would vote. Her level of engagement was minimal. She engaged Olson 3 times and Cayne 4 times; she had no questions or remarks for Hume or Stern. Although there isn't much to go on with her, I believe she will side with the plaintiffs for reasons given below.
Before going to the substance of the oral arguments, an overall assessment is helpful. Olson's oral argument was like going 10 rounds with the judges. They discussed a lot of different topics, and the judges were definitely critical of his arguments. He could have been better prepared in regards to being concise, less emotional and clearly articulating his points with surgical precision like that of Hume. However, even with these shortcomings he looked like an all-star litigant compared to the defense attorneys and the judges were receptive to his claims. If Olson polishes up his arguments, he is going to hurt them in a big way later on. Hume's argument was more technical. He had far less opposition and attitude than Olson from the panel, but the stones they threw were heavier. Hume did very well litigating his case, and was able to collect himself and give good responses when he met opposition; this is exactly what Olson needs to do in the future. Cayne's defense was horrible. He made a big mistake by altering his defense on the fly, and he paid the price big time! He looked foolish on more than one occasion. And it was obvious that his arguments were full of propaganda. Cayne was a better litigant than Stern, but the plaintiffs outperformed both by a long shot. Cayne flip-flopped more than a politician in his orals, and there was quite a bit that was rebutted below because it was simply wrong. Moreover, he did a fairly poor job of communicating his points. I partly feel that he didn't get much questions because the judges were letting him speak to either figure out what he was trying to argue or let him hang himself. Now to Stern. Much of the lawless behavior by Treasury and FHFA is embodied in the arguments of Mark Stern. First, he leveled a number of arguments that are flat out reprehensible to the justice and Congressional system. Second, some of them defy logic and sound like the arguments of someone that lives on another planet. He makes extremely foolish statements that even contradict his client's statements and actions. Stern's arguments are by far the poorest and most sinister of the defense. Fortunately the judges were all over him during his orals. Overall, the plaintiffs were more willing to give in-depth answers than the defense. Cayne and Stern, however, did not offer any significant intellectually challenging arguments to the judges. Propaganda and smoke & mirrors is what you expect from someone that is trying to cover up a crime; and that is precisely what FHFA & Treasury brought to the oral arguments. The defense arguments were filled with them.
Oral Arguments:
In this section the main points made by attorneys and objections raised by judges will be discussed. Main points from the various excursuses will be included here. The excurses are limited to the first 7 unsealed documents (4/13/16) from Court of Federal Claims. Most recently the plaintiffs have filed a brief to have the latest 53 unsealed documents (5/11/16) added to the records. Judge Sweeney has recently released 11 more unsealed documents (6/22/16). A copy of the oral arguments that includes times can be found here; find audio is here.
*Ted Olson:
GSE Profitability & Dividends, Deferred Tax Assets:
First, It became abundantly clear at the outset of Olson's argument that Judge Millett was not informed of the GSEs' financial strength before and around the NWS, as well as the differences in interest owed under the original agreement and the NWS (pg. 5-6; 4:20-5:40). It appears at this stage in orals that Millett has bought into the government's narrative that the companies were on the brink of insolvency, the NWS was a good deal for all parties, and that the GSEs are paying less in interest under NWS than in the original deal. She believes that there was a death spiral going on (pg. 11, 12; 10:43-11:22, 11:26-12:10). Millett's uninformed position and bent towards the defense's death spiral narrative was also displayed in her legally flawed hypothetical construct (pg. 22-23, 24-25, 34-37; 21:56-22:44, 24:37-25:2, 34:59-37:17). As shown in detail in excursus 1, Millett is wrong in espousing such beliefs, the death spiral narrative is not supported by the economic facts or record, and the GSEs have paid much more in interest under the NWS than they would if the original deal was kept in place.
Second, Ginsburg expresses objections to Olson's view that FHFA & Treasury knew exactly when the GSEs were going to take their deferred tax assets (DTAs) (pg. 9-10; 8:02-9:38). He also didn't initially appear to believe the weight of McFarland's testimony against Treasury that Olson espoused and said it was speculative recounting (pg. 10-11; 9:38-10:43); however, during a later interchange (pg. 16-18; 16:18-18:21) it appeared that Olson was able to convince Ginsburg that they were becoming and have become much healthier companies.
Conservatorship Roles & Responsibilities:
In response to Millett's question about profitability, Olson went down a path of discussion of payment-in-kind (PIK) vs cash dividend, and it garnered objections from Millett and Ginsburg (pg. 6-8; 5:52-7:28). Millett and Ginsburg rightly responded that the conservator is granted the discretion to make those types of choices. However, as explained in excursus 2, Olson rightly argues (and it doesn't appear that the judges understand) that it is about conserving and preserving the assets of the company towards rehabilitation. Olson sees this as one more step that the GSEs' conservator has taken to ensure they are not rehabilitated back to a sound and solvent condition; excursus 2 shows that they violated their statutory obligation to look after the GSEs' interests instead of protect them from and taking action in the interest of others (taxpayers, Treasury and Administration). Perhaps the judges will see Olson's point if they understand that the NWS sole purpose was to destroy the GSEs and the NWS was illegal by design; by the end of the orals, it appears that they are believing what Olson is saying, and it wouldn't be a stretch for them to go back on the position they took during the orals as seeing this within the realm of what FHFA was trying to accomplish as a conservator. Enough doubt was cast in the plaintiff's favor to lead to an administrative record being ordered to determine if neglecting PIK was part of their plan. If this is the case, they will see that FHFA wasn't acting as a conservator in disallowing the GSEs to do a PIK vs cash dividend and, thus, their decision is subject to judicial review under APA.
Later in Olson's argument Millett appears to say it is ok to use the NWS as a tool to hold the GSEs in conservatorship until Congress figures out what they want to do with them (pg. 13; 13:04-41). As explained in excursus 2, the conservator can't be directed by Treasury to implement the NWS (or anything else), they have a duty under HERA as conservator to conserve & preserve their assets and rehabilitate them to a sound & solvent condition; FHFA & Treasury can't use the NWS as a tool to hold the GSEs hostage, which excursus 2 shows is precisely what the FHFA and Treasury intended to occur (as well as wind them down). FHFA must operate in the conservator/receiver construct that all previous versions had; Congress didn't intend anything different, and FHFA and Treasury can't abuse the system to carry out their agenda! And since FHFA has fiduciary duties, incidental powers does not allow them to take what they want to serve their best interests, which shows that Millett and Ginsburg are incorrect in their view of the statute swallowing up previous law and tradition on a conservator's fiduciary duties (pg. 14-16; 14:02-16:18). Olson also says that such an interpretation is contrary to all other provisions in HERA; judges should look at 76 C.F.R. cited in brief (pg. 120-121; 2:35:45-2:36:48). Moreover, Millett has a very flawed view of conservatorship. Following remarks about FHFA being able to implement the NWS to hold them until Congress reforms the secondary mortgage market, she says that the GSEs are sound and solvent because they are making tons of money (pg. 14, 13:46-50). Olson rightly responds there and elsewhere that giving away all of your assets in perpetuity can never get you into a sound and solvent condition, especially considering that ability to borrow is not an asset/capital (as Treasury even claimed) (pg. 14, 25, 118-119; 13:50-14:02, 25:1-12, 2:33:2-2:33:41); furthermore, FHFA has stated in Samuels case that GSEs are insolvent due to a lack of capital (pg. 115-117; 2:29:25-2:32:41).
Judge Millett's hypothetical argument also touches on the responsibilities and discretion of a conservator. The hypothetical showed Millett's disposition towards the government's arguments (pg. 22-23, 24-25; 21:56-22:44, 24:37-25:2). As explained in excursus 2 and 3, it was a poorly constructed hypothetical because the defense's arguments are highly flawed, and the answer only highlighted the truth provided by Olson's answer, albeit one that wasn't well understood or received at times. However, Ginsburg absolutely understood and agreed with Olson's argument that it is impossible for a conservator to fulfill it's duties to preserve & conserve assets and rehabilitate to a sound an solvent condition when all the money is given to Treasury (pg. 25; 25:2-20).
In Olson's rebuttal argument, he makes a precise statement as to why the FHFA as conservator cannot be ordered by anyone (federal agency, etc.) what to do: FHFA's statutory obligation is the financial well being of Fannie Mae and Freddie Mac, where as Treasury's stated interest is the taxpayer (pg. 115-117; 2:29:13-2:32:41). HERA was supposed to protect the GSEs from situations like the NWS. Before the NWS, the FHFA announced that investors retain all financial worth in the GSEs and that it cannot determine to liquidate the company as a conservator; the NWS did exactly the opposite in both points (pg. 115-117; 2:29:25-2:32:41).
Illegal Nature of Net Worth Sweep:
There are two main ways in which Olson discussed the NWS as being illegal. Both are discussed in excursus 3. The first is with respect to paying dividends as PIK instead of cash (pg. 7; 6:17-36). As explained above and in excursus 3, disallowing dividends as PIK most likely was done intentionally as part of FHFA's malicious plan to wind down the GSEs. Second, Olson repeatedly argued that the NWS was not the act of a conservator (pg. 11, 13-14, 22-23, 24, 25, 37; 11:20-26, 13:41-14:02, 22:31-23:11, 23:38-24:37, 25:1-12, 37:17-59). Olson's response (i.e., NWS is anti-conservator) caused Millett to become a bit irritated with him on several occasions (pg. 12, 14, 17, 22-23; 11:26-12:10, 13:46-14:33, 17:40-47, 22:33-44), especially when he repeatedly gave it while discussing Millett's hypothetical. Olson never caved in to Millett's logically and legally flawed hypothetical, which frustrated her; the whole line of questioning eventually frustrated Olson (pg. 36; 36:32). Millett brought up her hypothetical several times, and it appears later on that she understands (at least in part) why Olson said it was illegal and not the act of a conservator; the degree to which she subscribed with his argument is another matter. She must have been somewhat convinced at Ginsburg's affirmation of Olson's argument on solvency (pg. 25; 25:12-18). On the surface, Olson's position might seem like a stance taken out of emotion with only a cursory view of the law (HERA). However, as discussed in a careful legal and economic examination of HERA in excursus 3, it is abundantly clear and irrefutable that Olson's point hits the mark precisely: the NWS is illegal under HERA and is not the action of a conservator as set forth under law or tradition. Moreover, excursus 1 shows how important the DTA are to paying down Treasury's obligation and FHFA & Treasury's collusive plan to destroy the GSEs. Olson clearly pointed out to Ginsburg (pg. 8-9; 7:29-8:02) that FHFA & Treasury only allowed the GSEs to suffer losses related to the DTAs and not benefit from them (Treasury was the only beneficiary of the DTAs).
McFarland Testimony, 10-Qs and Differing Views:
Olson used the McFarland testimony as support for his basis that the GSEs were becoming more profitable and financially sound. It appeared that Ginsburg believed (initially) that the NWS was justified due to the bleak financial outlook of GSEs reported in 10-Q statements (pg. 16-18; 16:18-18:25), which McFarland's signed several days after her meeting with Treasury where she painted a different picture of Fannie Mae's health. Ginsburg looked to Olson to answer the discrepancy between the 10-Qs and McFarland's testimony (pg. 16-18; 16:18-18:25). Olson said that other documents supported McFarland's testimony (pg. 18, 39-40; 18:30, 40:27-41:16). And Ginsburg's and Millet's objections about bleak outlook and only short term profitability reported in 10-Qs was dispelled by Olson (and appeared to clear up Ginsburg's doubt!) when he stated the obvious: the GSEs have been profitable for much longer than estimates and have returned $58 billion more than they received from Treasury.
Another discrepancy arises in the future profitability of the GSEs. Judge Millett tried to attribute these differences in GSEs profitability between McFarland, court documents and Treasury as simply 'differing views' (pg. 11; 10:43-11:22). It appears that she believed the documents showed they would only be profitable in the short term (1-2 years) (pg. 17; 17:40-47). Judge Ginsburg initially tried to attribute Olson's claim of an inadequate, incomplete and misleading record to this as well (pg. 19; 19:27-40). And even though it appeared that Ginsburg held more regard for the 10-Qs than McFarland's testimony, it looks like there was enough doubt in his mind that an administrative record needed to be produced to adequately address the discrepancies and determine if they are simply attributable to differing views; both sides (Olson and judges) are speculating, and the only way to find out is to have the record produced (pg. 40-42; 41:32-43:12). What initially looked to be bias towards the defense looks like it will advance the plaintiff's claims!
Administrative Record:
Since Olson's claim deals with the APA, a main topic of discussion was the administrative record. Olson argued many times that the administrative record was incomplete, inadequate and misleading (pg. 18-19, 19, 20-21, 25-26, 27-28, 39-40; 18:46-52, 19:27-33, 20:9-32, 25:20-45, 27:2-42, 40:1-41:16). He also said that plaintiffs were entitled to an administrative record (via Overton Park) to learn exactly why the FHFA & Treasury did what they did in order to support their claims: NWS was collusive behavior inconsistent with the acts of a conservator, illegal and it's purpose was malicious and intended to wind down the GSEs (contrary to the defendants' death spiral narrative, etc.) (pg. 19, 25-28, 120-121; 18:52-19:2, 25:20-27:42, 2:35:45-2:36:38). Ginsburg understood that Treasury announced it's intention with NWS was to wind down GSEs, but wanted Olson to provide evidence that FHFA also intended to wind down the GSEs with the NWS (pg. 26-27; 26:9-27:2). Excursuses 3 and 4 (forthcoming) clearly demonstrate that there is ample evidence to implicate that the NWS was designed and implemented as a group effort between White House officials, FHFA and Treasury. It was clear that Olson believes that an administrative record would support the plaintiff's claim that the NWS was designed to destroy the GSEs and prevent them from exiting conservatorship, and that it was a well-calculated move by FHFA & Treasury. In essence, an administrative record would support the plaintiff's claim of an illegal motive by FHFA & Treasury (pg. 39-40; 40:1-41:16). Olson said that the District Court must accept the plaintiff's complaint as true and at a minimum have an administrative record produced (pg. 27-28, 42; 27:2-42, 43:15-36)!
What Plaintiffs Want for Relief:
On a few occasions, the judges seemed sympathetic to plaintiff's claims and asked Olson what relief he was requesting. He told Judges Ginsburg and Millett that plaintiffs want the Court to recognize/declare NWS is contrary to FHFA responsibilities as conservator, is illegal and done at direction of UST (illegal under HERA) (pg. 19, 29-30, 32; 19:2-24, 29:30-59, 31:49-32:12). Olson said that must be the Court's response if they found NWS the actions of a receiver instead of conservator (pg. 29; 29:1-14). Olson also said he wanted to depose Ugoletti, get e-mail traffic, etc. in order to make the administrative record complete (pg. 20-21; 20:3-32); they are entitled to an administrative record. Whenever Ginsberg and Millett noted only multiple occasions that getting the administrative record could validate FHFA and Treasury's claims (essentially saying that Olson could be shooting himself in the foot by getting it), Olson said that he is ok with that (highly doubted that being the case) and that they were still entitled to one (pg. 21, 117-118; 20:32-52, 2:32:41-2:33:2). Ginsburg even said that if FHFA wanted to liquidate (assuming FHFA didn't think GSEs would ever be profitable), there is no way they could do it all at once, so they had to slowly get things ready to a point they could liquidate the company and wind down the GSEs; the NWS wouldn't have been benign but legal (pg. 38-39, 40-41; 38:48-40:22, 41:32-42:18). Again, Olson said any record produced would not support it. Olson also said that any type of monetary compensation would be something that the District Court judge would have to work out with attorneys after the facts of the case are determined and a judgment rendered at trial (pg. 31-33; 31:47-33:34).
Conservatorship and Receivership - Transition & Actions:
During oral arguments, Olson stated that the NWS was not an action of a conservator but those of a receiver; the essentially pulled the receivership trigger with the NWS but refuse to acknowledge it as such (pg. 16; 16:4-18) because that would have required rights of shareholders and creditors to be respected (pg. 25:48-26:9). Ginsburg appeared to agree in response. Olson argued that FHFA couldn't perform the actions of a receiver while under conservatorship (pg. 28-29; 28:13-29:1).
This prompted Millett to go down a path (her 2nd hypothetical) that seemingly downplayed the NWS as a simple technicality by asking if NWS would have been legal if done as a receiver and the real complaint is that they just didn't follow the law from a technical perspective of giving notice (pg. 29-30; 29:24-30:55). Olson showed that transition to receiver isn't a small oversight made, that HERA spells out what has to take place, that a small technicality wasn't their intent (take steps to wind down but not act as receiver, which they could easily have done), and that rights of shareholders and creditors must be taken to account; Olson said that they could have easily transitioned to receiver but didn't want to do it as a receiver but takes those steps as a conservator (pg. 30-31; 30:55-31:27). It appeared that Millett finally understood Olson's argument and the gravity of the NWS (pg. 37-38; 37:17-38:48).
*Hamish Hume:
Objection to Fiduciary Duty Claim:
The first objection comes to Hume's fiduciary duty claim (pg. 43-45; 43:43-47:12). Hume starts off by saying that his claims are not APA claims but breach of contract and fiduciary duty common law claims. Judge Millett objects by asking how can it survive a statute that gives all rights of shareholders to FHFA and allows FHFA to act in interest of GSEs or itself. Hume rebuts with discussion of case law on derivative and direct claims. Argument: previous derivative and direct claims rulings held by other Courts under FIRREA, which awarded claims to shareholders, directly apply and show that court allows this as a valid claim. Logic of argument: GSE lawsuits are subject to FIRREA, Courts held FIRREA allowed derivative fiduciary duty and direct claims to reap $ billions for shareholders when there is a manifest conflict of interest [MCI], Congress knew about derivative and direct claims with MCI via FIRREA when it enacted HERA, HERA was taken partly from FIRREA, and previous judicial rulings apply when Congress adopts laws with similar statutes. Hume points out something that is very telling of the weakness of the defendants' case: they use the exact same logic to proclaim a papal blessing from Congress on the NWS when it enacted the 2016 Appropriations act (including Jumpstart GSE Reform Act) but they don't address the plaintiff's use of this argument in their defense! In other words, the defense expects the judges to say that they are allowed to use such logic but the plaintiffs cannot!
Now that Hume has provided an avenue that proves his point, Millett goes after the basis for using this case law. First, she goes after his ability to make a derivative claim by saying there is no MCI (pg. 45-48; 47:20-51:2). Millett's logic: if HERA says that FHFA can act in interests of GSEs or itself, how can there be a conflict of interest and, thus, a derivative claim (which requires a MCI) if it acted in its own interests? Hume says Millett is wrong; Court has ruled many times (e.g., Kellmer case) that there doesn't need to be an MCI to bring a derivative claim. Then Millett tries to say that when HERA says it can act in its own interest, this includes deciding whether or not to sue itself (i.e., allow derivative claim). Hume rebuts by saying that he would attach his claim for HERA allowing derivative claims on the word conservator, and that Millett can't infer a meaning that would bring an obvious due process violation. Second, she says that she doesn't see anywhere in brief where Hume claims a direct fiduciary duty claim. There is an interplay in this discussion that bodes very well for plaintiffs (pg. 49-52; 51:23-55:42). Hume said that he does not, but that case law allows him to amend his complaint if judges think he should. He also said that he did brief a breach of implied covenant of good faith. Ginsburg said that would be sufficient to obtain their relief if successful, and then comments that although FHFA fiduciary is not like a normal one, it must administer an inherent conflict in good faith! Essentially, Ginsburg sees this as the legal avenue that defense is trying to claim, and Ginsburg says that it isn't going to fly!
Economic Substance, Dividends & Contracts, Profitability:
Hume takes a shot at the defense during remarks that are about economic substance (pg. 51-54, 60-62; 54:7-57:48, 1:3:3-1:6:47). He says that all they will bring is highly formalistic legal arguments, and will never deal with the basic economic substance of the case, which then breaks down. And case law (Delaware & Virginia) says that where there is an implied covenant claim, substance governs instead of legal formalisms! The original deal allowed for a 10% dividend and warrants to purchase 80% of common stock at a nominal price (~ $10-15k for 80% of two Fortune 50 companies!...seriously, think about how big of a steal it is…). Implications of that deal: 1) Treasury is a stockholder and put in various clauses showing it (choice of law, venue, they have rights, can litigate, etc.), 2) they receive dividends as a stockholder. Dividend order under that deal: 1st) 10% - senior preferred, 2nd) 5-8% - junior preferred, 3rd) rest - common. NWS was enacted, and 3 years later the GSEs have paid $130 billion in excess of what the original deal would have given them. If the federal government had exercised its warrants, they would have gotten ~ $100 billion in dividends after ~ $6-9 billion to junior preferred. But Treasury didn't want to give other shareholders anything, so they bypassed mandatory dividend rights in contracts! Dividend rights say you can't pay anyone junior. NWS did exactly that: NWS bypassed junior preferred dividends, which are senior to common, and commons didn't get anything (they are entitled to dividends rateably with any government common shares). Actually, Treasury shouldn't get any common dividends since they still haven't exercised warrants! FHFA/Treasury answer is 'no breach of contract because written terms haven't been altered.' Hume goes on to say that it can't be contested that NWS materially adversely harmed interests of private shareholders without giving them a vote; their contracts entitle them to 2/3 vote for any change!
Between those remarks on dividends and contract rights, projected profitability is discussed (pg. 53-56; 56:1-59:30). Hume remarks that not only did McFarland believe that they were about to get $50 billion in deferred tax assets back, but the internal Fannie Mae and Freddie Mac projections (recently unsealed documents from Court of Federal Claims) said they would have paid back dividends by 2019-2020 (conservative but very optimistic). Ginsburg got excited at this and never objected, as Olson never discussed the internal projections.
Objection to Direct Claim:
Judge Millett objects to the validity of the direct breach of contract claims (i.e., the claim Hume made about their contractual rights to dividends) due to the conundrum that the 2016 Appropriations Act provided (pg. 58-62; 1:1:13-1:6:47). Essentially, the appropriations bill included the Jumpstart GSE Reform Act by Senator Bob Corker, which previously failed to make any traction in the Senate; it was a failed bill put out by two Senators who made millions off of shorting the GSEs (one who racked up by far the most stock trades by a U.S. Senator). The bill says that Congress can't sell its shares until 2018. Millett asked if she was incorrect to think that coupling that with the bill's provision that GSEs have to pay off Treasury first means that plaintiffs don't have room for a claim. Hume rightly responds to her logic with a brief legal argument: if something in 2016 Appropriations Act is inconsistent with previously established law, then it would be a breach (because the bill's text is invalidated by established law)! Millett doesn't respond to the remark, and it seems like her objection to the direct claim is satisfied.
FHFA: To Be or Not To Be The Government - That is the Question:
Oral arguments end with a slightly complicated exchange between Hume and Millett on their ability to file claims when the fiduciary (government) is sovereign (pg. 62-67; 1:6:47-1:11:43). The objections raised here by Millett are probably the ones with the most teeth on them. All others she raised were less convoluted in answering. It starts off by Hume maintaining that shareholders still have an implied covenant with respect to their contracts regardless of the whether the actions were taken in good faith for the GSEs or to benefit others (FHFA or taxpayer). Millett points out that FHFA acting as a fiduciary is not the same as an ordinary fiduciary. Hume agrees and Millett gets Hume to acknowledge that they are the government (and, thus, trying to prove her point that his claim isn't valid). However, Hume flips the argument in his favor and shows that the he has the upper hand instead. The FHFA has claimed in the Court of Federal Claims case (where discovery documents came from) that they are the federal government. However, in the District Court cases litigated here the FHFA has not claimed to be the federal government. When Millett presses him on the subject, he reveals the huge bind that the government is in: the government has to get their cases to go both ways for them to win (i.e., have one court deny claims because they aren't the government while another denies them because they are the government), where as plaintiffs only have to have it one way to win (courts can deny one set of claims but not both)! The reason that this case is in the District Court is that the FHFA is not claiming to be the government and hasn't claimed sovereign immunity like Millett is arguing! If Millett and FHFA want to press the issue, Hume says that the most they can do is force the venue to change to the Court of Federal Claims. But this would be bad for the FHFA because the plaintiffs could bring even more claims there!
*Howard Cayne (FHFA):
12 U.S.C. 4623D - A New Defense?:
Imagine the case you have written multiple briefs on over several years has finally gotten to a stage where you are arguing it in court. It's been so long and you know the argument and case law backwards and forwards. Then when you get to court the judges ask shortly before oral arguments if a section of U.S.C. you (defendant) or the plaintiffs never discuss in your briefs applies to the case. You look it over and decide that you just got a gift from heaven: the judges provided you with a boost to your defense that clearly proves your case! You decide to alter your argument on the fly and press hard on your newly discovered path to victory without having thought much about it to build a strong argument. If you do this, it might prove that 1) you don't have your act together, 2) your defense really is that weak, or 3) all of the above. Welcome to the world of Howard Cayne of Arnold and Porter, defense attorney for the FHFA or the government…or whatever they are calling themselves these days. So Cayne goes up to bat with his shiny new weapon feeling like a million bucks, and Ginsburg gives him a reality check from the bench (pg. 68; 1:18:44-1:20:4). When asked how he could have overlooked such an important statute that proves his case, Cayne says that the case has morphed over time so much; Ginsburg countered with skepticism and Cayne responds with a scared stupid laugh. The heat is on for Howard Cayne, and Ginsburg cranks up the thermostat several times in the argument.
Judge Ginsburg starts off by asking him how he sees his defense fitting into 12 U.S.C. 4623. Cayne says that NWS was not a discretionary supervisory action (pg. 69-72; 1:20:4-1:26:6). He then gets to the heart of his defense. The plaintiffs claim that FHFA has broken all sorts of laws and are running companies into the ground with very little capital. He says their claims focus on FHFA as conservator, but the NWS was implemented in their duty as regulator as a capital reclassification action. Under the old paradigm the GSEs had to maintain certain capital levels like normal banking institutions. Cayne claims that what FHFA Director Lockhart did in 2008 was create a new paradigm in which Treasury's commitment is sufficient to meet the regulator's capital standards. And since the FHFA as regulator is allowed to alter the capital classifications in its duties and no court can tell a regulator how to operate (like 12 USC 1818(i)), their actions are not subject to judicial review and the claims should be dismissed (see point 2 for a more detailed account of defense's argument). The readers should recall that HERA was big on capital requirements as part of evaluating the GSEs' health and putting a system in place for getting them to a healthy financial condition if they started to decline. Shortly after the FHFA became their conservator, they announced on 10/9/2008: "The Director has determined that it is prudent and in the best interests of the market to suspend capital classifications of Fannie Mae and Freddie Mac during the conservatorship, in light of the United States Treasury's Senior Preferred Stock Purchase Agreement. FHFA will continue to closely monitor capital levels, but the existing statutory and FHFA directed regulatory capital requirements will not be binding during the conservatorship."
The defense's use of 12 U.S.C. 4623 comes up again at the end of Cayne's oral arguments (pg. 89-94; 1:54:59-2:0:30). Things get juicy here. Ginsburg brings Cayne back to his previous answer that the NWS was not a supervisory action but a capital reclassification. Cayne says he didn't remember what he said (…really, you don't remember how you are defending your case?), but Ginsburg wittingly shows his skepticism of Cayne's defense when he replies that he's been keeping it in mind. He then shows his skepticism by pointing out that 12 U.S.C. 4623A has two options: 1) entities of various types of capital classifications (adequate, under-capitalized, significantly under-capitalized, critically under-capitalized, etc.) or 2) supervisory action of director. Cayne replies that the whole capital classification was set aside in 2008 by FHFA Director Lockhart, and was then altered again with DeMarco implementing NWS. Ginsburg replies that does not work: if it isn't a change in the menu (option 1), then it is a supervisory action. Ginsburg is essentially trying to disprove Cayne's defense that 12 U.S.C. 4623 applies. Cayne replies that he wasn't prepared to discuss 12 U.S.C. 4623. Ginsburg reminds Cayne that he brought it up confidently in his defense! He then lets Cayne borrow his iPhone so he can read the statute and defend his use of it. The grill marks are looking quite nice at this point. So what does Cayne reply with? Option 1 or 2? NEITHER!! Cayne goes to 12 U.S.C. 4623D (a completely different part of the 4623…it has 4 subsections) and quotes his favorite part: 'no court has jurisdiction to effect by injunction or otherwise.' Section A, which is where Ginsburg was discussing, describes jurisdiction; section D discusses limitations of jurisdiction. Since Cayne didn't give an appropriate answer, Ginsburg had to spoon-feed him his response and Cayne agreed. Essentially, Cayne is going back on his word: earlier he said that the NWS was not a discretionary action of the Director, but now he is saying that it is. If you thought that the FHFA was making it up as they go, here is more ammunition for you. Not only does Cayne never use this as a defense in his briefs before arguing it in court, he changes his position during the oral argument! Another demonstration of the FHFA's 'make it up as you go' defense is seen in Cayne's misorganized and contradicting presentation of the paradigm shift as regulator. Ginsberg doesn't show much confidence in Cayne's presentation. After Cayne apologizes for not being better prepared, Ginsberg jokingly says that he didn't have much time to prepare! And after the judges allow him and all other attorneys submit on 12 U.S.C. 4623, Cayne comments that his arguments are clear but will submit nevertheless; Ginsburg wittingly replies that it might be less clear on rebuttal! Finally, in Olson's rebuttal argument, Ginsburg asks him if he has any devastating comments on 4623 (pg. 119-121; 2:35:1-2:36:38). Olson responds that it is incomprehensible that FHFA never thought to raise what they now say at suggestion of Court that 'oh, this lawsuit should never have taken place whatsoever.' Ginsburg wittingly responded with "Homer nodded," meaning he thinks Cayne has made an error in trying to use 4623 as a line of defense!
FHFA's Paradigm Shift Defense:
Several different things will be discussed in this point. First, Cayne's defense utilizing 12 U.S.C. 4623 will be explained. Then it will be shown that his defense using the new capital paradigm (shift) has some glaring inconsistencies. This is followed by a rebuke of claims made by Cayne in the new paradigm defense.
Explanation of Defense. As previously discussed, FHFA claims that this whole issue is about what the FHFA as regulator did. Recall that the FHFA was granted the power of conservator and regulator in HERA. What Cayne essentially tries to do is to use two different laws to dismiss the complaint. First, Cayne is trying to use 12 U.S.C. 4623 to protect a change to this supposed new capital paradigm in his opening remarks (pg. 69-72; 1:20:14-1:26:6): "…as you Court will know from the statute, it says that the, if the Agency as regulator…when the Agency is regulator, reclassifies or changes capital classification, that might be challenge, but beyond that anything relating to a changed capital classification according to the statute is not subject, it may not be affected in any way by an order of any court….and the regulator made the regulatory decision that we will, the Agency will allow that to satisfy capital standards. So, again, this, it was not challenged at the time, and so what the statute says is that this action by the Agency as regulator to establish a new capital paradigm for the duration of the conservatorships may not be affected by injunction or otherwise in any manner…" If this is allowed, then this supposed new capital paradigm can be in place for the NWS to be allowed. This is what Cayne attempts to validate next. Before going to that, it should be mentioned that the two law defense isn't exactly correct. Cayne actually thinks that 12 U.S.C. 4623 is valid for dismissing all complaints: "the statute reference in the Court notice to Counsel also fully precludes each and every claim in this matter seeking relief, Your Honors." (pg. 68; 1:18:44-1:19:28). So we can thinking of it as strengthening his case, much more on the front end (capital paradigm) than the back [NWS]. The second part of dismissing the complaint uses HERA. During Brown's interchange with Cayne (pg. 88-89; 1:53:14-1:54:56), the defense discusses who is not subject to judicial review via HERA: "…that was…a paradigm of a business judgment. The business judgment was made by the conservator…but that is the heartland of what Congress said, we are a power that we are investing in the conservator that we don't want to authorize third parties or shareholders, or courts to challenges, we want this to operate as a business." There is the defense in a nutshell: he says 12 U.S.C. 4623 allows FHFA to implement the paradigm shift without judicial review and HERA allows FHFA to move within that paradigm without judicial review; and the former also invalidates all complaints also, although he never explains how! This really makes one question what Cayne's defense was going into the oral arguments. If he didn't ever consider 12 U.S.C. 4623, how was he going to defend a supposed new capital paradigm in 2008? In my opinion, it would have been quite poor. After he gives his defense for using 12 U.S.C. 4623, he goes into a discussion of how capital directives are used by various regulators to change capital without being subject to judicial review. He goes on to say: "that is precisely what is implicated by the statute that the Court has referenced." And that's it folks; Cayne makes no other connection of capital directives to HERA or utilize case law of how they apply to this situation (like the remarks made by Hume). He simply says that regulators use capital directives to change capital, they aren't subject to review, and that is what 4623 says too. That was likely his defense of the regulator action before the Court asked about 12 U.S.C. 4623. If that was in HERA or any other law or case law gave a regulator express rights to alter the capital requirements without judicial review, then Cayne would have used it. But he didn't because HERA doesn't authorize that type of behavior, nor is there any type of universal ban on judicial review for capital reclassification.
Inconsistencies in Defense. It was stated earlier that Cayne's defense is a 'make it up as you go' defense. I will show here that Cayne is not even consistent in his oral argument about the specifics of this paradigm shift. I didn't notice this at first since it is rather subtle, but I hope to show the reader that this is significant in making a defense, which Cayne does quite poorly. First, go back to the first description that Cayne presents (pg. 69-72; 1:20:4-1:26:6). Ginsberg asks if NWS was a discretionary supervisory action. Cayne replies no, and that the new capital paradigm (shift) happened in 2008. But he never discusses the NWS there. He was asked specifically about NWS but responded that 1) the NWS wasn't a supervisor act and 2) there was a paradigm shift that happened in 2008. Then look at the next exchange that Cayne has; this time it is with Millett (pg. 72-73; 1:26:6-1:28:54). Millett asks if it is Cayne's view that plaintiffs are challenging the capital paradigm of the NWS, if it is the new capital paradigm decision by the director. Cayne responds that is not correct by clarifying precisely what he is saying: "No, what I'm referring to…the new capital program that never has been challenged that was established in 2008 sets precisely that, an action was taken by the Director at that time, in September, 2008, that said going forward the normal capital classifications, whatever the percentage was, I don't recall, three, four, five, six, seven, eight percent no longer applied." So up to this point Cayne has said: 1) the NWS was not a discretionary supervisory action, 2) it was the action of the FHFA as regulator, 3) the new paradigm happened in 2008.
Going through the rest of the remarks that Cayne has on this will show that there is inconsistency in his story. First, look at the next Q & A by Millett and Cayne (pg. 73-77; 1:28:54-1:36:16). Millett describes the paradigm up to the NWS: Director's decision to avoid receivership by Treasury supplying credit. Cayne agrees. Then Millett asks if "…that was their decision, the Director's decision as conservator…?" Here is Cayne's response: "That was the, the agreement, Your Honor, was executed between the enterprises, so it was, the enterprises and Treasury, so it was authorized by the Federal Housing Finance Agency in its capacity as conservator." Who authorized it? The conservator or regulator? Cayne is even confused; two sentences later he even contradicts himself (see pg. 74): "…the Agency as regulator in that capacity authorized this new capital paradigm…the conservator on behalf of the enterprises will enter into an agreement with the Department of Treasury." See 'Rebuke of Comments' below (4th point there) for a related discussion. Second, look at Cayne's response to Millett (pg. 86-87; 1:51:32-1:52:54). He makes four points in his response. Here is what he says in his last one: "…the only issue for this Court to resolve is whether the conservator exercised the power granted by Congress, and that in this case is a simple determination because the conservator exercised the power, the power to operate the institutions, the power to enter into contract, when it executed the original agreement in 2008, and that has never been challenged." Cayne's argument has been that the new capital paradigm was made by the regulator; thus, what he should want the Court to rule on is it affirm that the actions were taken by the FHFA as regulator and the claims are invalid as a results of that regulatory decision. But this is not what Cayne says; he points to the question being the actions of the conservator! Plaintiffs don't argue that FHFA are barred from entering into contract; instead, they argue that FHFA has to fulfill its duties as conservator when it does so! Plaintiffs don't have any issue with the 1st SPSPA (Hume even says so: see pg. 122-123; 2:38:22-2:38:43). Cayne said earlier (see previous paragraph) what has never been challenged since 2008 is the new capital program put in place by the regulator; but here Cayne is saying that it is the conservator who exercised it's power in making the agreement in 2008 that has never been challenged! What is odd is the fact that regulators don't require conservators to agree to their capital paradigms; regulators make regulatory decisions that don't need to be signed off by anyone. What is even more odd is the fact that none of this is supported by the facts of this case (see excursus 4)! More flip flopping!
Rebuke of Comments. There are several comments that need to be made which rebut Cayne's arguments made with respect to the new capital paradigm (shift) enacted by the FHFA as regulator. First, it is used to downplay the severity of the NWS. By saying that the capital requirements changed in 2008 and that 2012 was simply operating in that new paradigm is a gross misstatement of the difference between the NWS and the original agreements. The NWS was a radical amendment that was nothing like the original agreement or the 1st or 2nd amended agreements. It is absurd to try to argue otherwise. Second, Cayne boasts that FHFA is the expert that Congress trusted as conservator (pg. 76; 1:29:42-1:36:16). Expert, huh? Let's see how well the expert performed its statutory requirement to conserve & preserve the GSEs and keep them in a safe and sound condition: 1) Cayne says now that the NWS turned out to be a bad deal (pg. 86-87; 1:51:32-1:52:54). The NWS has caused the GSEs to pay $125-165 billion more in dividends and given them virtually no capital to operate on; in other words, the GSEs would have paid 65-83% LESS in dividends if the original 10% dividend were maintained (depending on full or zero amortization of remaining profit; see excursus 1). This has caused their CEOs to express deep concern, as well as Director Watt, for depleting capital and the need for a future bailout. Treasury has not put one penny into the GSEs since the NWS was enacted 3.75 years ago. The consequences have been significant, and there has been ample time for the conservator and Treasury to see that the deal was hurting the GSEs instead of helping them and correct the problem. Instead, the expert conservator has done absolutely nothing to prevent the GSEs from becoming insolvent! 2) On multiple occasions in 2011 and 2012, the Executive Branch and Treasury made public statements that its intended purpose was to wind down the GSEs (see forthcoming excursus 4). For instance, HUD and Treasury issued a joint report in February 2011 (Reforming America's Housing Finance Market: A Report to Congress) that stated this. And Treasury made an announcement 1.5 years before the NWS (2/11/2011) (see here too, for example) and right after the NWS was implemented (8/17/2012) where it expressed its intention was to wind down the GSEs. If the FHFA is an expert conservator, why would it ever enter into an agreement with Treasury that would advance its plan to wind down the GSEs? And if it was seeking to fulfill its duty to conserve & preserve the GSEs and bring them back to a sound and solvent condition, wouldn't they attempt to nullify or alter the deal when Treasury announced that the agreement it just made with the conservator was done to expedite the wind down of the companies you have a statutory obligation to protect!? Well, the answer to these questions is shown elsewhere (excursus 4, forthcoming) that the FHFA has utterly violated their fiduciary duty and HERA, and tries to lie with a straight face about the whole ordeal! Third, Cayne says that conservators and receivers do not have different powers and duties when Millett says that FHFA is performing the actions of a receiver while still being a conservator (pg. 77-81; 1:36:16-1:43:12). This is utterly ridiculous! The duty of a conservator is to nurture the company back to sound financial health, while the duty of a receiver is to bring the company to close; the end goals of conservator and receiver are antithetical to one another! Anyone with common sense and has done a cursory reading of HERA can understand that is utterly false. Cayne continues on with some false claims about what is encompassed in a conservatorship; these claims are rebuked in excursus 2. Fourth, Cayne treats the events of the new capital paradigm and the senior preferred stock purchase agreement as occurring at the same time: "…So, what we have here at the outset in 2008 at the time the institutions were put into conservatorship, a new capital paradigm was established." (pg. 69-72; 1:20:14-1:26:6) That is not the case. The SPSPAs were executed on 9/7/2008 and the capital requirements were suspended nearly one month later (10/9/2008). Neither the announcement of GSEs going into conservatorship (9/7/2008) nor the original SPSPAs mention anything about capital classification being suspended. This didn't occur until it was announced on 10/9/2008. Furthermore, FHFA's announcement of placing the GSEs into conservatorship contains a list of pertinent items that Director Lockhart conveyed, and suspension of capital requirements is not one of them! Thus, the original SPSPAs were carried out with the capital classifications that HERA prescribed, i.e., there was no new capital paradigm at the time of the original SPSPA! This is what happens when you try to add things to your defense on the fly: those little important details out there invalidate your defense. Fifth, Cayne lays on the propaganda with regards to shareholders. He tries to spin it that the conservator as the hero that saved the day for the good of the country and the taxpayer, while the shareholder is the bad guy that Congress doesn't care about. Cayne tries to pit the two against one another, when that isn't the case at all. He says that FHFA was appointed conservator to operate the businesses not in the interest of shareholders but to keep the national mortgage market operating (pg. 74-77, 82-83; 1:29:42-1:36:16, 1:44:45-1:46:03). Let's think about this for a minute. Congress appointed the FHFA to be the conservator of the GSEs because (they claim) were in trouble and needed to be put into a sound and solvent condition. If FHFA fulfills its statutory requirement to ensure the financial health of the GSEs, then the shareholders benefit greatly from that because the companies that they own continue to operate and their shares have value! Congress indeed does care about the national mortgage market, and caring about that requires caring about the GSEs (they are the secondary mortgage market), which they certainly did express care for in HERA. Thus, Congress' concern for the economy is directly linked to the welfare of the taxpayer shareholders; they cannot be separated under the intention of HERA!
There is one interesting thing that Mr. Cayne failed to look at in 12 U.S.C. 4623. In labeling it a supervisory action to try to mitigate judicial review, the statute explicitly says that the FHFA's actions are subject to review by the Court in section b: "The Court may modify, terminate, or set aside an action taken by the Director and reviewed by the Court pursuant to this section only if the court finds, on the record on which the Director acted, that the action of the Director was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with applicable laws."
2016 Appropriations Act Defense:
Cayne boasts about how the 2016 Appropriations Act demonstrated that Congress gave the papal blessing to the NWS (pg. 81; 1:37:56-1:43:12): "Congress was in fact signing off on the current structure of the shares because we know from the regulators they thought…" Judge Millett asked Cayne about how the 2016 Appropriations Act (which included Jumpstart GSE Act) affected the plaintiff's claim. Their dialogue (pg. 81-83; 1:43:12-1:46:3) shows more inconsistencies with Cayne. He did say at the beginning that he hadn't thought much about it (see pg. 81), and it shows. He argues that it bars the court from changing the "attributes" of shares. Then when asked if it barred removing the NWS, Cayne said no since that is an "term" of the shares. But later, he said that the shares and its "terms" are what he claims Congress told Treasury to hold. More morphing, more flip flopping! What is even more odd is that the plaintiffs addressed this in their brief to the court. Olson argued in his rebuttal (pg. 115-117; 2:29:25-2:32:41) that the bill's sponsor and other Congressional leaders explicitly stated that the 2016 Appropriations Act does not bar or impact the plaintiff's claims or Court to act in any way (see pg. 31-32, document 1600742)!
Periodic Commitment Fees:
If you think that Cayne's defense prior to this point are an indication of how things will finish for him, you would be correct. The last ~ 14 minutes are an embarrassment for him. This includes the discussion he has with Ginsburg on his use of 12 U.S.C. 4623 (where his defense fits in), which was discussed previously in point 2. But before that is an equally pathetic showing from Cayne when the periodic commitment fee is discussed (pg. 84-89; 1:46:54-1:54:55). His poor defense shines before the judges. First, he chides the plaintiffs for never discussing the periodic commitment fee in their briefs, and claims that it is so important. He states "the periodic commitment fee was intended to compensate the tax payers for the market value of the remaining commitment by the Department of Treasury." Before being cut off by Millett, he chides the plaintiffs again for never bringing it up: "So, this periodic commitment fee that Class Plaintiffs ignore, not once do they mention it." So Millett asks how much it would have been. After making all that fuss about how important it was, here is Howard Cayne's answer: "…the commitment fee has never been determined." He then continues on with how important it is with discussing the NWS: "…Treasury was giving up not only the right to the $19 billion, it was giving up the right to the periodic commitment fee, which was under the terms of the agreement intended to reflect the value of this…" When asked again what it's value would be by Millett, Cayne says "The only sense I have, Your Honor, is the fact that Congress passed the legislation indicates well, they thought it was worth…" Even though Treasury never made a calculation of the fee, the justification for it having value is because Congress said so. Wow! This answer looks like the equivalent of 'my dog ate my homework!' Cayne looks foolish peddling this failed narrative.
Hume addresses Cayne's remarks in his rebuttal (pg. 123-124; 2:38:55-2:40:22). Hume says they don't address the PCF because it was never charged. After arguing with Millett on it having no value, Hume says that classified information shows it would have been significantly less than the money paid in the net worth sweep.
Quickly, let's look at the PCF from a logical perspective. Cayne explains that the periodic commitment fee [PCF] was intended to compensate taxpayers for market value of remaining commitment (pg. 85) since, as Stern says, it is an ongoing risk to taxpayers (pg. 97). Treasury has already given GSEs $189 billion but still committed to provide $258 billion more (pg. 85-86). It should be noted that this isn't exactly the same story told by Stern next! Stern claims that part of what GSEs are paying Treasury for is the money they have already given them and what they have already committed to give ($258 billion) (pg. 101-102). Do not misunderstand Stern's comment. He isn't saying that the PCF should be based off of $447 billion instead of $258 billion. That is not the discrepancy. Stern is saying that under the NWS, which includes only the dividend and no PCF, what the GSEs are paying for is Treasury's previous $189 billion and remaining $258 billion!! Cayne is saying that the PCF has been waived under the NWS but Stern is saying that the NWS is a much larger version of the PCF. This is a disastrous blunder by the defense! Since this is Cayne's segment, let's focus on what he says to be the truth. Cayne said that the FHFA not only gave up it's guaranteed $19 billion annual dividend but the PCF as well. But there are a four problems with FHFA's claim that this is a big deal. First, we already knew how that the PCF wasn't important to Treasury since they never took the time to calculate it. Second, there was no significant change in value before and after the NWS (should they have charged it, that is) since the amount of committed funds has been capped by Treasury since the beginning of 2013. Treasury didn't commit more money in the NWS; that has been capped since 2009 and the cap went into effect shortly after the NWS. Third, the PCF would have decreased if the GSEs continued to draw because it is tied to the remaining commitment (not what Treasury has already given the GSEs)! Thus, the concern for the GSEs' health doesn't play a factor into this fee; it declines as the amount of committed funds decreases. Fourth, Treasury and FHFA didn't have to waive the PCF at all! They could have kept it in place along with the change in dividend structure . If they gave it up on of their own volition, they can't hold it over the GSEs' head for the favor they gave them. They claim that the change in dividend structure (10% to NWS) was done to protect them from going under via a so-called 'death spiral;' however, there is no indication or claim from the defense that the PCF was also done to protect the GSEs from lowering Treasury's commitment.
Excursus 3 dives deeper into the changes that the 3rd amendment to the SPSPA (NWS, etc.) brought. The propaganda that is discussed there will be an expansion of the discussion above. It will flip the government's arguments on its head to expose their agenda, propaganda, lies and the inconsistencies in their argument. Excursus 3 will show that the NWS was a well-calculated and lawless collusive activity by Treasury and FHFA to destroy the GSEs and meet the budgetary problems that the Administration and Congress was facing.
*Mark Stern (Treasury):
I believe that it is very fitting in evaluating Cayne's arguments just presented and using as a point of reference for Stern's orals a comment that Ginsburg gives towards the beginning: "But the Congress acts by enacting a statute, and Mr. Cayne and you both seem to want to avoid discussing the terms of the statute in any detail, and viewing this at 30,000 feet looking at the purpose in 2008 and so on, but we have to grapple with the terms of the statute, part of which was drafted from the FDIA, or through FIRREA, parts of which were tacked on for this occasion, and we're stuck with that." So does Stern dive into the statute details? After evaluating his orals, I don't believe that he does whatsoever. It is shown below that his arguments are filled with smoke and mirrors, morally corrupt, lawless, absurd, out of touch with reality, void of common sense and lack any type of legal basis.
Conservator Committed Ultra Vires:
So Stern is ready to dive deep in explanation of things, right? Well, his first task is to discuss claims of ultra vires (going beyond the powers of authority laid out in the law) (pg. 99-105; 2:7:57-2:16:56). Stern denies it as a possibility of their actions, and then Millett asks him why it's not considered ultra vires given what plaintiffs claim. He gives two answers. Both are exceedingly poor. First, Stern says that looking at the nature of the statute, there is no liquidation and GSEs are solvent due to the enormous commitment of Treasury. The former is rebuked at the end of point 3. Second, "…there are no good answers for exactly how to proceed…and it's been Treasury's position, you know, for a long time that ultimately legislation, you know, is needed to deal with this, and indeed that was the sense of the Congress resolution…" Stern is silent on how the NWS doesn't violate FHFA's statutory duties like Olson articulated. More arguing at 30,000 feet from him. Moreover, he makes a very telling indication of motivation. They implemented NWS because Treasury always believed that Congress should reform the secondary mortgage market. As explained in excursus 2, FHFA and Treasury can't hold the GSEs hostage to wait for Congress to put the final bullet in them; that's not what HERA ever envisioned or any other conservatorship has looked like. And he even tries to justify the NWS by citing the 2016 Appropriations Act as proof that Congress feels the same way. In regards to Stern's argument, even if Congress felt that way that bill was signed 3 years after Treasury took its action in implementing the NWS! Later in that argument (see pg. 102) Stern argues that there is no judicial review to second-guess how well a conservator's judgments are and that the NWS does not fit what anybody would consider ultra vires since it doesn't go against an explicit statutory provision. Another bad argument from Stern. Someone should inform him that in the U.S. legal system, if a law tells a conservator to preserve & conserve assets, it would be considered ultra vires to engage in activity with the express purpose of winding them down (exact opposite). Ginsberg closes this portion by reminding Stern that HERA does have limitation: FHFA must act necessary and appropriately as conservator or receiver.
The last instance where ultra vires is peripherally discussed (pg. 109; 2:21:59-2:22:19) follows Ginsburg combating Stern's claims (i.e., nothing has ever been done to suggest collusive or illegal behavior) with Treasury's NWS announcement. Ginsburg says that FHFA had two alternatives to the NWS: act as a conservator (which they didn't want to do) or act as a receiver by moving towards liquidation. Stern denies that it is a move towards liquidation, but says that it is something that they could do. Ginsburg maintains his 'slow move towards liquidation' hypothesis in response. As explained at the end of point 3, Stern's comments are directly contradictory to his previous remarks.
Administrative Record:
After the discussion on ultra vires, it switches to the administrative record (pg. 102-105; 2:13:17-2:16:56). Ginsberg brings up the administrative record. He says plaintiffs claim it was incomplete. Stern says he takes issue with that. Ginsberg responds that things have been produced which weren't in record. Here is how Stern responds to that. First, he says that Treasury can supplement but argues that it isn't appropriate. Second, he focuses nearly all of the argument on trying to discredit the plaintiffs by focusing the discussion entirely on McFarland vs 10-Q statements. See previous discussion on Olson's orals (points 4 and 5) for analysis on rebutting Stern's dismissal. So how does Stern argue against saying that the record is incomplete? Smoke and mirrors! More 30,000 feet arguments! These are serious claims, and discovery in Court of Federal Claims has shown that there are many documents that Treasury and FHFA failed to produce in administrative record (actually, FHFA never even tried to produce an administrative record). Stern doesn't even attempt to discuss this but tries to divert the attention somewhere else (the only place that looks favorable to defense) where affirmation of that would not even dismiss the point raised by Ginsburg! Then Ginsburg says that Overton Park can be used as justification for supplementing record. Stern says a couple of different things. First, Stern says it really doesn't apply since the record is clear. Oh, really!? Then what are those 11,000 documents Treasury and FHFA are hiding in Court of Appeals!? Stern's argument is extremely disingenuous! Second, he says it's a purchase agreement (very poor argument). We know from Olson's argument that Ginsburg seemed convinced that the administrative record needs to be supplemented (overturn Lamberth ruling). Did Stern persuade him otherwise? Ginsburg's response to Stern doesn't appear that is the case: "You see, it goes beyond even what you said, though, Mr. Stern, it says the court may require the administrative officials who participate in the decision to give testimony explaining their actions." Then there is a jaw dropper of a claim made by Stern (pg. 105; 2:16:21-2:16:56): "And there's certainly no basis for doing it here…if everybody knew, which of course they didn't and couldn't, but if everybody knew in August of 2012 exactly what the pattern was going to be…for the next three years…that's not, like, unlawful, you know, there's no basis for saying that there should be administrative review even if you assumed that everybody knew exactly what was going to happen." Let's think about what the Stern just said. After again dismissing the notion for supplementing the record, he then goes to the extreme. Stern says that even if everyone knew what was going to happen (which he claims they didn't know), implementing the NWS would not be considered illegal and that still would not warrant the administrative record being supplemented! I am in disbelief of how entrenched in lawlessness that Treasury is; it truly believes that it is above the law and so does its attorney! This argument goes beyond the law and sanity; it is morally reprehensible! And if you thought that Stern was done with jaw dropping arguments, you would be mistaken. This point finishes but the similar arguments continue in discussing conservatorships (point 3).
JM's Hypothetical, Treasury's Flawed View of Conservatorship and HERA:
Throughout Stern's oral argument, he says some things that seem entirely incomprehensible for an attorney to believe. There are some big jaw droppers in there. First, Stern starts out early by showing an extremely flawed position on HERA (pg. 96-98; 2:03:29-2:06:19): "…did Congress mean for there to be room for claims that this was sort of a bad feel, this isn't really the way, you know, that a conservator acts, this sounds more like somebody who's thinking about putting sort of like the possibility of liquidation, so maybe that's sort of kind of a little bit more than we expected from a conservator? And that is not something that could possibly have been intended, nor can it possibly be the case that knowing the stakes that were involved in this that Congress would contemplate actions for rescission of agreements that were going to govern this." In essence, Stern is saying that even if there is a case where conservator isn't acting according to HERA that Congress never intended for plaintiffs to be able to file a suit to challenge their actions. This is the tip of the iceberg for him. Second, Millett follows up the discussion of administrative record (see point 2) with the worst possible case (pg. 105; 2:16:56-2:17:31). She asks Stern to consider the worst case possible that plaintiffs could find: everyone at FHFA and Treasury knew what was going to happen, they knew they were about to be and stay solvent for 3-4 years, they get excited and then collaborate on how to implement a new agreement (i.e., NWS) that "we're going to take all of that money and leave them not a penny to get back on their feet with." She then asks Stern if a conservator can do that and would the worst administrative record (just described) prove the plaintiffs case that FHFA wasn't acting as a conservator. Stern's response: "I mean, I think that a conservator could do that given the position, like, the extent to which, like, the ongoing Treasury commitment, you know, is crucial, they could decide that…but …it should be clear…nothing that has been adduced, like, sort of would support that kind of claim…" This is another lawless response from Stern. He basically said that collusion is ok since Treasury is committed to giving support. That is his defense. Stern is saying that Treasury can be as lawless as it wants in a conservatorship; that the law doesn't apply to them since they helped GSEs out. The judges don't articulate what they think about this lawless comment (the lack of siding with Stern on anything likely says it all), but Ginsberg does address Stern's claim of clarity that nothing has been adduced that would support a claim of collusion / worst administrative record possible (see point 4). After Stern makes that claim, he goes back to the smoke and mirrors tactic by trying to divert attention to Olson's remarks to Judge Millett's hypothetical. He knows that Millett took issue with it, so he brings it up to try to steer attention away from his response. As discussed in excursus 3, Stern is absolutely wrong in his dismissal of Olson's argument because Olson is entirely accurate in stating that the NWS is illegal under HERA.
The next points are made in a discussion that interweaves wind down and conservatorships. Third, Stern claims that the NWS is not a liquidation, and that the wind down is something that HERA says conservators can do: "…the statute specifically contemplates, like, the wind down as being a power that can be asserted, like, in the conservatorship,…" (pg. 106-108; 2:18:45-2:20:57) More unlawful arguments from Stern. His understanding of HERA is completely contradictory to the statute itself, as winding down is something that is antithetical to the responsibilities of a conservator (conserve & preserve assets and rehabilitate to a sound & solvent condition). When Ginsburg asks Stern where he got that from, the defense says 4617(2). Ginsburg doesn't agree by saying that "respectively" is implied, upon which Stern says he disagrees with Ginsburg's assessment: "I disagree, Your Honor, because there are a lot of powers that are set out specifically for the conservator and the receiver in the statute, this one doesn't make that." So let's look at the text of 4617(2): "...Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity." Stern's comments are absolutely foolish. Stern says respectively is not implied there, and that all of those roles can be done by conservator and receiver since no distinction is made. Oh really!? So a receiver has the duty to reorganize and rehabilitate a regulated entity? And a conservator has the responsibility to wind up the affairs of a regulated entity? This argument is flat out foolishness! Fourth, several absurd remarks are made by Stern in a dialogue with Millett and Ginsberg before Hume's arguments are discussed (pg. 109-110; 2:21:59-2:23:43). After denying that the NWS is not a move towards liquidation, Stern claims: "Well, but…they could legitimately do that, like, if that's what they wanted to do, they could do that. There's nothing wrong with a conservator doing that." When asked by Millett if the set up stage to liquidation is what conservators or receivers can do, Stern responds with smoke and mirrors. Again, he tries to avoid the question by painting the picture of what happened as setting up for liquidation when the entity is failing. Plaintiffs and judges likely wouldn't disagree with this; I wouldn't even disagree with this. However, that is not the facts of the case here! Treasury and FHFA are the cause of GSEs having no capital; the poor financial condition that the GSEs are in is entirely due to the FHFA and Treasury's actions, and failing would be entirely due to their behavior, not the economy! As discussed in excursus 3, forced receivership due to regulator's abusive and collusive action is not what HERA, U.S. Code or tradition of conservatorship ever allowed or envisioned a conservatorship to look like! Stern then goes on to say that there is no reason to believe that there is a setup to liquidation but says that statute (HERA or 4617(2)) grants a conservator that power. More absurdity and lawless argumentation from Stern. As previously discussed, his understanding of HERA and 4617(2) is utterly wrong. Moreover, what is odd about Stern's comments is that they are not consistent with a previous comment, where Stern admits that the NWS move of reducing their retained MBS portfolios is like winding them down! (pg. 107-108; 2:19:57-2:20-57) In other words, he previously said their actions were those of a receiver but he is now saying they are those of a conservator!
Wind Down of GSEs:
Following Stern's comments about there being nothing to support a claim of FHFA & Treasury collusion, Ginsburg brings up two major objections to that claim. The first is the Obama Administration's 2011 white paper which said that the GSEs should be wound down, and that the NWS made it concrete that they were going to wind down the GSEs (pg. 106-107; 2:18:45-2:19:16). Stern doesn't initially reply to this comment in the context of wind down but conservatorship (see point 3). However, he does make an extremely interesting comment about it: "I believe that the Third Amendment talks about an acceleration of, like, the, of like of the enterprises reducing or retaining mortgage portfolios, and in that sense that's a kind of winding up. The, like, what you have in terms just of their ongoing functionality is not, like, in any sort of particular, sort of, like way, it's winding up,…you know, we've said this many times that legislation is appropriate." (pg. 107-108; 2:19:57-2:20:57) So Stern admits that reducing their MBS portfolio is a step in the wind down process, and that they believe that Congressional action is appropriate! He really isn't helping his case of 'no evidence of collusion.' His remarks merit a response from Ginsburg; this is the second occurrence. Ginsburg brings up some evidence in Treasury's announcement of the NWS to discredit Stern's claims and then more details on Treasury's position is given (pg. 108-109; 2:20:57-2:21:59). This dialogue starts off with a bombshell from Ginsburg: "But when the Third Amendment was announced the Treasury said we're going to wind this thing down, we're going to kill it, we're going to drive a stake through its heart, and we're going to salt the earth so it can never grow back." The courtroom is laughing and Stern is speechless! He then claims: "I don't remember that language." Again, Stern is taking a position in court that isn't even supported by the statement of his client! Ginsburg's response is wonderful: "Yes. You may be confusing it with Tortego (phonetic sp.). But that was the gist of it, we're not going to allow it to be recapitalized in any way, and we're going to look to a future in which the GSEs don't play a role." Stern reiterates his previous point on what Treasury thinks is appropriate: "Well, I think what Treasury has said repeatedly is that it thinks that congressional action is appropriate…" Ginsburg cuts him off and lets him know where he stands in a frustrated tone: "But defending the congressional action it has to live within the statute it's got." Stern says that they are living within the statute and the alternatives (likely means recapitalization) are not good ones. More 30,000 feet arguments from Stern. This whole line of arguments from Stern is a rather poor showing; but to be quite honest, it is very much par for the course for his outing.
Validity of Different Types of Lawsuits:
The last 5 minutes of Stern's oral arguments discuss the claims raised by Hume (pg. 110-115; 2:23:43-2:28:58). There is a lot of back and forth between Stern, Ginsburg (mainly) and Millett (little). Stern is essentially trying to label their claims as quintessential (prime example) derivative claims and have the claims dropped. Recall that Hume argues they are direct. The judges continue to side with Hume throughout this dialogue. Ginsburg claims that they are trying to preserve their liquidation preference if that were to occur. Stern comments that it hasn't been taken away and "…you know, what they've got, they've got…" (see pg. 114) Ginsburg then asks sarcastically "What have they got?" which causes the courtroom to erupt in laughter because they all know (including Ginsburg) that the GSEs have gotten royally fleeced by FHFA and Treasury! Bottom line, Ginsburg isn't buying the narrative that Stern is selling. Stern responds with more propaganda and incoherent rambling.
Rebuke of Comments:
There are several of Stern's comments that need to be addressed. First, he say early on that "The fact that we are here today at all is the result of this legislation [HERA]." (transcription error; pg. 95-96; 2:1:13-2:3:21). That is entirely fallacious. The reason that they are in court is because of violations of contract rights, APA, fiduciary duty and HERA with what FHFA and Treasury did in the NWS. Second, in discussing the NWS (pg. 99-102; 2:08:40-2:13:17) Stern makes an outlandish claim that the FHFA and Treasury could have agreed to the terms of the NWS at the beginning of the conservatorship. What conservator ever would agree to those types of terms for a stockholder? Right at the outset of getting financial assistance, you would agree to give away 100% of all profits in perpetuity? Stern truly is out of touch with reality! Third, in that same section of discussing the new dividend structure with NWS, Stern has the audacity to say that Treasury is taking risk in not knowing what is going to happen in order to not put GSEs under by having to draw on commitment. What is baffling about this remark is that Treasury's own announcement of the NWS, FHFA OIG reports, testimony by FHFA's DeMarco all state that the intention of the NWS was to wind the GSEs down (see excursuses 2 and 4 - forthcoming)! Fourth, more false statements are leveled when Stern uses the death spiral narrative and claims that the GSEs would be paying more in dividends without the NWS than with it. Both have previously been discussed; excursus 1 (also see a similar Seeking Alpha article) clearly shows that they are absolutely false: the GSEs would have paid 65-83% less in dividends (from no to full amortization of leftover profits)! This amounts to the GSEs paying $125-165 billion more in dividends under the NWS! Clearly, this is a false narrative put out by Treasury and FHFA.
How Will Judges Rule:
Millett:
Judge Millett's vote is hard to tell. It is very clear from Olson's testimony that she had some deep dispositions and flawed views going into the oral arguments. She had clearly drunk the government's Kool-Aid, which most of the media passes out. Her bent is alarming, and the government did it's best to play to those bents by reiterating its narrative. Did Olson and Hume convince her that her views are wrong; were they able to sway that initial bias? Consider the several points that she was advocating.
First, in Olson's argument she didn't believe that the GSEs were as profitable as Olson claimed. And later on she said that that the documents produced only demonstrated that they would be profitable in short term but not long term. However, Olson responded that they have paid back amount given to Treasury + $58 billion, which convinces Ginsburg. And Hume shows her that internal GSE projections showed long term profitability (although conservative than what happened). We don't hear much after TO's statement or anything at all after Hume. She does brings up profitability in her hypothetical to Olson, which hints that she still is of that persuasion. However, she does bring up the reverse in a hypothetical to Stern (they would be profitable over 3-4 years). It isn't clear if her mind was changed; hopefully the plaintiffs convinced her that her initial disposition is grossly incorrect. Second, she doesn't ever believe Olson's argument of paying dividends in kind to help out with solvency. She sees that as discretion of FHFA. Third, she expresses some pretty disturbing views in favor of the government: there is a death spiral (tied to profitability), it's ok for FHFA to just hold them until Congress figures out what to do with them, and that the GSEs are sound and solvent if they are making all sorts of $ like TO claims. The defense really tries to play to her disposition by reiterating what she believes to be true. Fourth, there is the issue of FHFA acting in interest of GSEs or FHFA in incidental powers provision. It's not clear where she will come down on this, as Olson and Hume both rebutted her fairly well on it. Fifth, there is the Millett hypothetical. Some will point to this as showing she will vote for the defense. However, if you listen to the audio, you will see that the last time she brings it up there is not a tense exchange but laughter in the courtroom. She brought it up multiple times. Olson didn't clearly show why his answer is correct, which could be why she didn't understand and kept raising it. In that hypothetical she claims that it was done to stop the hemorrhaging and is a win-win for everyone. She raises Olson's response to the defense in discussing powers of a conservator and committing ultra vires. Unfortunately, Cayne and Stern are never pressed hard on this. It's hard to know whether she just understands what Olson's argument is or believes it. Hopefully it is both. Sixth, Hume responds to her very well in all of her complaints. The only one that it appears she got any teeth on was on sovereignty. However, the FHFA isn't claiming it and the most that it would do is cause their claims to be moved to Court of Federal Claims. I doubt that she will dismiss or remand to the other court when defense doesn't argue that point. Seventh, she asks Olson about what relief he is requesting, as well as asks the defense if 2016 Appropriations Act would stop plaintiffs from getting relief. This might be an indication of her seeing how relief could be granted to plaintiffs, and could be a good sign for them. Eighth, she got horrible responses from the defense a few times: periodic commitment fee (Cayne), conservator powers to implement NWS vs receiver (Cayne), ultra vires to give away all money (Stern), and worst administrative record possibly (Stern). She couldn't have been happy with them at all since they were so horrible, but she never did press them hard on their poor responses. Ninth, she doesn't appear to buy Stern's argument that seeks to deny claims by Hume. This bodes well for plaintiffs. Tenth, she is heard laughing when Judge Ginsburg tells Stern that Treasury announced they were going to salt the earth with Fannie and Freddie, kill them so that they never return. She can't just see this as a joke. She has to understand the text that he quotes from. Treasury's motive is on display, and she laughs. This looks good for the plaintiffs.
When all of this is weighed, I would estimate her vote as 1:1 or 3:2 in favor of defense. It's hard to know where she stands on the arguments made. If she believed the plaintiffs arguments, she should have pressed the defense much harder than she did.
Ginsburg:
Judge Ginsburg's vote appears much clearer than Judge Millett's. Like Millett, he hammers Olson hard on some things. But that appears to be the end of any opposition to plaintiffs. And in fact, it appears that some of those issues he had in Olson's orals are reversed later on. Here is a summary of the points taken to determine his position. First, it appears that he (like Millett) doesn't understand how PIK option can prevent insolvency, that going with a cash dividend instead of PIK is a discretion of conservator and that incidental powers allows for FHFA to act in its own interests. Although it doesn't seem like he is convinced otherwise of the first two, it does appear in Hume's orals that the FHFA does have to administer it's inherent conflict of interest in good faith. Second, Ginsburg doesn't appear to believe the weight of McFarland's testimony is speculative rather than definitive, especially since it contradicts the 10-Qs she signed and pessimistic view by Treasury. The defense tries to play to this. He even tries to accredit the discrepancy to differing views out there and wants Olson to show him other evidence of positive earnings. Ginsburg got it when Hume showed him the internal Fannie and Freddie projections that were made right before the NWS! Third, Ginsburg wanted to see statements from FHFA on the wind down of GSEs; it appeared that the ones by Treasury was not what he wanted to see. Moreover, Ginsburg never pressed Cayne on Treasury's statement. It would appear that he isn't convinced that there is collusion; however, seeing him siding with the defense is a far-fetched idea (as shown below). Fourth, Ginsburg understood through Olson's explanation that the GSEs were only able to take on the bad (losses) of the deferred tax assets but not their good (gains) side due to the NWS. This is very good for plaintiffs. Fifth, Olson completely agreed with Olson that there is no way possible for the GSEs to ever get into a safe and sound financial condition when they give away all of their profits to the Treasury. Sixth, it appears that Ginsburg agrees with Olson that FHFA has pulled the trigger on receivership but hasn't admitted it. When rebutting Stern, Ginsburg even says that they didn't want to act like conservator but like a receiver and move towards liquidation; he believes that they are moving slowly towards liquidation. Seventh, it appears that Ginsburg is sympathetic to Olson's claims by asking him about what he wants for relief. Also, it appears that he is sympathetic for Olson's desire to have the administrative record complete, as well as the need to have the record completed to clear up the differences of opinion between the judges and plaintiffs! Later on he asks Stern if plaintiffs were granted relief, would it entail Treasury selling it's shares (2016 Appropriations Act). Eighth, Ginsburg does not say much in Hume's orals, but what he does say is in favor of plaintiffs. He remarks that a breach of implied covenant could be successful and be adequate for relief claimed as a fiduciary. Ginsburg also sides with Hume of the case needing to be in District Court rather than the Court of Federal Claims. Ninth, Cayne's use of 12 U.S.C. 4623 as a jurisdictional bar does not go over well at all with Ginsburg. He continued to poke holes in Cayne's use of it, and couldn't have been impressed with his flip-flopping or claiming to be unprepared. Cayne's use of it garnered witting comments from Ginsburg of 'didn't have much notice,' 'you brought it up confidently' and 'it may be less clear on rebuttal.' Ginsburg might as well have already ruled on Cayne's use of 4623 when he told Olson that 'Homer nodded' (affirming that Cayne erred in his defense). Tenth, during Stern's defense (after Cayne's orals) Judge Ginsburg states that Stern and Cayne argue the statute at 30,000 feet and never grapple with the text. I don't believe that Stern did any better than Cayne at digging into the text. Eleventh, there are several important things that Ginsburg does not believe Stern's defense on: FHFA committed ultra vires by implementing the NWS, the administrative record is complete, Overton Park applies, and the power of conservator to wind down in 4617(2) (gross misreading of statute). Twelfth, Ginsburg rebukes Stern's claims that there is no evidence to suggest collusive behavior between FHFA & Treasury to warrant an administrative record to be completed. He gives a couple of damning pieces of evidence: Obama's 2011 white paper (produced by HUD & Treasury) and Treasury's announcement of the NWS. Thirteenth, there are a couple more times where Ginsburg shows disagreement with Stern and siding with plaintiffs: disagreement of Stern's argument to dismiss Hume's direct claims, and wittingly rebuking Stern with 'what have they got?' (conveying that he knows Treasury has royally fleeced the GSEs and isn't buying Stern's propaganda).
Weighing all of this information, I estimate Ginsburg to favor the plaintiffs 5:1 to 7:1. The only chance the defense has is a miracle or Millett somehow swaying him (I believe it would be the other way around).
Brown:
Judge Brown has little to say throughout the entire proceeding. However, there are several tangible pieces that come in where we can glean what direction she will vote. First, during Olson's argument he is making his point about GSEs never able to get to sound and solvent condition under NWS (Millett's hypothetical) and Brown is heard agreeing with him and laughing at his humorous remarks (~ 22:44). She is also heard laughing when he describes the death spiral (~ 25:20). One of her comments to Olson is about the NWS not being successful (helping to clarify Millett's hypothetical since Millett is getting frustrated). Later on she asks a question about flowing from conservator to receiver, and Olson answers her well. Second, Brown combats Cayne's claims of FHFA acting within statute to do its job with a question about ultra vires. It seems from the dialogue that she sees through his argument and that FHFA committed ultra vires. Third, Stern gives a response to Ginsburg that 4617(2) states that conservator has the same power as conservator and can wind down a company. Ginsburg ultimately rebuts him. But it can be heard in the audio that Brown chimes in at the same time and her tone highly suggests that she is in disagreement with Ginsburg (~ 2:19:00-2:20:00). Fourth, She is heard laughing with Judge Millett when Judge Ginsberg gives his dramatic summary of Treasury's announcement of the NWS (2:20:57-2:21:24). And upon Stern's reply of 'I don't remember that language,' Brown is heard saying 'close enough!'
There is not much information to go on to determine how she will vote. However, I think that the evidence points to her siding with the plaintiffs 2:1 to 4:1. Moreover, I'm sure that Judge Brown would not mind ruling for the plaintiffs in such a case that would deal a huge blow to the Obama Administration since he tried to stop her from being appointed to the Court of Appeals in 2005.
Conclusion and Investor Relevance:
The Court of Appeals will be ruling in the next few (2-4?) weeks on the Perry Capital et al. vs. Jacob J Lew et al. (FannieGate) court case. A detailed examination of the court proceedings was conducted. It shows that the plaintiffs were much better prepared and better litigants than the defense attorneys. The plaintiffs presented a much better case and satisfied the judges' questions than the defense, which used propaganda and smoke and mirrors. The defense is likely hoping for more biased media coverage and the judges to not look too closely at the material presented. Based on the oral arguments, I expect the plaintiffs to have a big advantage: 71-84% chance of victory! If the plaintiffs are allowed to add the recently unsealed 53 documents to the Court's record, this will likely increase it to above 90%. Only time will tell how the judges vote. There is a reason that the defense does not want this case to proceed to trial. If an administrative record, discovery and trial proceed, we all know that the defense case will utterly crumble! Any unbiased judge will see right through the false narrative and tactics of the defense.
The outcome of this case is extremely important to current and potential investors in Fannie Mae and Freddie Mac. If this case is remanded back to District Court, it will be the second most advanced court case for GSE investors. The Court of Federal Claims is the other case, which continues in discovery and is waiting for Judge Sweeney to rule on plaintiffs' motion to compel the defense to produce 11,000 documents that the defense is trying to keep out of the hands of plaintiffs. A number of other court cases have been filed across the U.S. Now that the Court of Federal Claims has unsealed 64 documents, other court cases will have access to the unsealed documents. Treasury and the FHFA have been fighting all of these cases from proceeding to trial. If the Perry Capital et al. case proceeds to trial, the proceedings will heavily favor the plaintiffs. The reason for this is as follows. The District Court judge Royce Lamberth believed the defense claims as true and never allowed the plaintiffs to ever proceed to the discovery phase or require Treasury or FHFA to produce an administrative record. The plaintiffs have shown in their arguments as supported in the unsealed documents that Judge Lamberth was wrong in dismissing the plaintiffs' claims. Excellent rebuttals have been written by legal scholar Professor Richard Epstein. If the Court of Appeals remands the case back to District Court, Judge Lamberth will be exceedingly upset to learn that the defense lied to him in their briefs. It will severly degrade their credibility in his court. It will then become a case for the plaintiffs to lose; the defense will be the ones fighting a huge uphill battle.
A win in the Court of Appeals for plaintiffs will likely be a turning point in outcome of court cases for plaintiffs. The common stock of Fannie Mae ($FNMA) and Freddie Mac ($FMCC) currently trade below $2.00 per share. A remand back to the district court will be the start of a rise in the share price for both GSEs. Plaintiffs' case is very solid, and they have a good chance of victory if the case proceeds to trial. If they do win in District Court, Judge Lamberth will likely declare the NWS to be illegal and determine damages for plaintiffs. The damages could be serious ($100-$300 billion) due to their severity. The actions taken by Treasury and FHFA are equivalent to financial homicide if the plaintiffs' claims are true. Furthermore, if the claims of another case are determined to be true (i.e., Treasury and FHFA forced large paper losses and then collected dividends on the GSEs), then it would be shown to be premeditated financial murder, and the damages should increase by another $100 billion. These outcomes bode very well for investors. Setting back the 3rd Amendment and giving damages to the plaintiffs could give a large boost to returning the companies back to the preferred and common shareholders. Investors should keep a close eye on the upcoming outcome of Perry Capital et al. This truly is the investment of a lifetime. Investing in Fannie Mae and Freddie Mac before court decisions are rendered could easily be a 100-400% gain in the short term and much longer in the long term.
Disclosure: I am/we are long FNMA, FMCC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
40,445 people have FNMA in their portfolio
Follow FNMA
About this article:Expand
Recommended for you:
Leslie Luk
Don't Be Out Of Fannie And Freddie Leading Up To Q2 Earnings
Leslie Luk • Jul. 12, 2016 10:25 AM ET
Glen Bradford
Senators Who Advocate Shorting GSEs Fear Unilateral Action That Ends Conservatorship
Glen Bradford • Jul. 8, 2016 4:21 PM ET
Glen Bradford
Government Admits Return In GSE Legal Filing
Glen Bradford • Jun. 10, 2016 10:45 AM ET
Malay Bansal
Review Of Risk Transfer Efforts By Freddie And Fannie, And A New Approach
Malay Bansal • Jun. 13, 2016 2:45 PM ET
Comments (5)
Track new comments
Duke802
Comments (248) |+ Follow |Send Message
YES LONG as well & Plan to buy more- the USG should not be allowed to OWN Fannie & Freddie the FIRST Nationalized bank institutions in US History
13 Jul 2016, 11:14 AM Report Abuse
Reply
3
Like
monty42
Comments (16) |+ Follow |Send Message
Good nerd sh%@! Great research presentation!!!
13 Jul 2016, 11:19 AM Report Abuse
Reply
0
Like
63094
Comments (22) |+ Follow |Send Message
Well written. I remember why I am not a lawyer - reading , writing and articulation. Well done article.
13 Jul 2016, 11:27 AM Report Abuse
Reply
0
Like
BestPick
Comments (233) |+ Follow |Send Message
I am LONG, over a year now.
13 Jul 2016, 11:31 AM Report Abuse
Reply
0
Like
mobreezy
Comments (35) |+ Follow |Send Message
This statement startled me a bit
"Millett appears to say it is ok to use the NWS as a tool to hold the GSEs in conservatorship until Congress figures out what they want to do with them"
How can a Judge say this about a profitable shareholder owned company that is healthy and should be released under definition of Conservatorship?
13 Jul 2016, 11:37 AM Report Abuse
Reply
0
Like
Before you comment, why not add your picture?
Username (*required)
Add Your Comment:
Share your comment:
Related Pro Research
Fannie Mae: The Government's Most Recent Motion To Dismiss And Fairholme's Motion To Stay by Charlie Harrison
Long GameStop: Sohn Investment Idea Contest Entry by Matthew Chan
Short Dexcom: Sohn Investment Idea Contest Winner by Marc Grow
EXOR S.p.A: Lollapalooza by GreenWood Investors
Top Performing PRO Articles
Generac Holdings: Investors Should Be Cautiously Optimistic by Michael Boyd
Long Sierra, Short CalAmp - Betting On Convergence In Margin And Valuation by Brendan Rose
The Journal Media Group: No Debt, Strong Free Cash Flow And Operating In An Industry Ripe For Consolidation by ValueArtifex
Blackbaud: Should Corporate Stewardship Trump Valuation? by Jenks Jumps
ETFs & Funds
Retirement Income: CEFs Are Expensive. Can A Low-Cost ETF Do The Job As Well? by Left Banker
Equity CEFs: The Overbought And The Underloved by Douglas Albo
Biotech ETF IBB Short Squeeze May Be Ahead by Ed Wijaranakula
CEFs: Overvalued And Undervalued Multisector Funds - Second Quarter 2016 by Alpha Gen Capital
Top Authors|
RSS Feeds|
Sitemap|
About Us|
Contact Us
Terms of Use|
Privacy|
Xignite quote data|
© 2016 Seeking Alpha
$6.50 by August still cheap.
They are on our side trust me!
This truly is the investment of a lifetime. Investing in Fannie Mae and Freddie Mac before court decisions are rendered could easily be a 100-400% gain in the short term and much longer in the long term.
EXCELLENT OPPORTUNITY TO ADD SHARES ON THE CHEAP HERE!
NICE OVERALL UPTREND ON THE 6 MONTH CHART
Should be around $6 for Q2 earnings, it may go up a dollar this week or two next week, but by the fourth of August for earnings it should be around $6
Joint Brief for FHFA, Fannie Mae 07/13/16
and Freddie Mac
Brief for Department of Treasury 07/13/16
Reply Brief for Class Plaintiffs 07/20/16
Per Curiam
FOR THE COURT
IT IS STRICTLY BACKED UP BY PRICE ACTION THEORY WATCH THE MOVES, LOOK AT THE 6 MONTH CHART FOR FMNA, IT IS BUILDING UP.
THE MOMENTUM IS GAINING!
Excellent opportunity read the WHOLE thing STUDY UP!
Unilateral Government Action to End the Conservator-ships
If you have already built up your core positions in Fannie, you don't need to do a thing. However, if you are currently sitting on the sidelines waiting for more favorable court developments, you might want to consider getting back in leading up to earnings release (at least, a small position). An upcoming positive announcement could easily see Fannie and Freddie back above $10.
Fannie Mae reports Q2 Earnings on August 4. Due to the sharp decline in Treasury yields because of BREXIT, another draw will be required.
Due to the complications that another Treasury draw would bring about, the Treasury is expected to allow the GSEs to be recapitalized before Q2 earnings are announced.
FNMA short term target: $6.50
It should run up here just about $1 per week until the fourth of August Q2 earnings release. Then to $20+ through the middle of August. Common share valuations by Richard X. Bove and Bill Ackman, are in the neighborhood of $20.
Bill Ackman is a billionaire investor and hedge fund manager worth $1.6 Billion. As well as: Founder, CEO, Pershing Square Capital Management, L.P.
There will be major resistance at the $6.50 level.
Of course first we have to get through the $2.50, and $3.50 resistance levels respectively.
Read the previous posts! There are long term resistance levels, at $2.50, $3.50, and $6.50 respectively. Why will the share price increase to those resistance levels? see previous posts.
Of course first we have to get through the $2.50, and $3.50 resistance levels respectively.
There will be major resistance at the $6.50 level.
It should run up here just about $1 per week until the fourth of August Q2 earnings release. Then to $20+ through the middle of August. Common share valuations by Richard X. Bove and Bill Ackman, are in the neighborhood of $20.
Bill Ackman is a billionaire investor and hedge fund manager worth $1.6 Billion. As well as: Founder, CEO, Pershing Square Capital Management, L.P.
Fannie Mae reports Q2 Earnings on August 4. Due to the sharp decline in Treasury yields because of BREXIT, another draw will be required.
Due to the complications that another Treasury draw would bring about, the Treasury is expected to allow the GSEs to be recapitalized before Q2 earnings are announced.
FNMA short term target: $6.50
Unilateral Government Action to End the Conservator-ships
If you have already built up your core positions in Fannie, you don't need to do a thing. However, if you are currently sitting on the sidelines waiting for more favorable court developments, you might want to consider getting back in leading up to earnings release (at least, a small position). An upcoming positive announcement could easily see Fannie and Freddie back above $10.
Hey man, do you recommend that now is a good time to jump in for a quick intraday trade?
BATTLE OF THE BULLS ECRY VS TGRO
ANYONE HAVE THAT INFO?
good to know
ECRY = EPIC
Mike Statler is EPIC
Breakout Boards: #36 eCrypt Technologies (ECRY)
$1.00 ECRY EASY
you are 100% correct here is the link:
http://seekingalpha.com/article/1900441-tiger-oil-and-energy-inc-why-it-could-drop-big-in-the-blink-of-an-eye
Nice entry point Harvey
What do you think this one will hit?
BEST TIME TO GET IN IS NOW
IMHO