Lol. And every piece of legislation would quote the same Richard Epstein article from 2014.

Seriously, is he your alt?

I expect them to know more than Rodney5.

Let me preface this by saying that I'm not an expert, but here is my understanding:

The warrants are not yet executed; Treasury just reserves the option to take 80% for a nominal amount.

Assuming a senior to common conversion is more than 80% dilutive--they won't get $186B of value--Treasury would have to sell at least part of their conversion stake so that they don't exceed the 79.9% threshold.

But I was replying more specifically to the common buyout nonsense.

Buying out all commons before the warrants are executed would be taking 100% ownership, and then making the warrants effectively worthless (they would simply dilute themselves upon execution). Buying out commons after the warrants are executed is >80% ownership, so they'd have to immediately sell anything they bought, which makes no damn sense.

Here is a quote from the Congressional Budget Office (CBO) paper on recap scenarios:



I would expect that the CBO knows what is possible and what is not.

The text you linked only indicates that Treasury cannot perform the action unilaterally. I don't see any reason why FHFA can't renegotiate it's contract with Treasury. FHFA has almost unlimited power as a conservator, and this would be in the best interests of the enterprises to avoid $19B a year in dividends and open the door for recap.

Also, the CAFC already characterized the NWS as a dilution of existing equity, so the courts clearly aren't concerned about dilution.



Treasury effectively owns 80% of the enterprises. They have no reason to buy out existing common. Also, they can't own more than 80% of the enterprises anyway.



The companies still need to raise capital. Any raise will need to occur after the warrants are executed, otherwise investors are throwing 80% of their money into a hole. Treasury's warrants and shareholders common stock could account for only a quarter of that $263B, depending on how much new money is needed to fill the capital shortfall.

After the last amendment to the SPSPA's, Treasury dividends don't resume until the GSE's meet their capital requirements. If they are recapping solely through retained earnings, then it'll take years--if ever--for Treasury to see another penny from their current investment.

So the incentive is to let the companies raise private capital at some point, but the SPS and warrants are standing in the way of attracting new investors. Some people imagine that the seniors will be converted to common shares, and after executing the warrants, Treasury will be able to recoup over $100B. The timeline for recap might be the end of Biden administration, since there's incentive to use this money for public policy objectives rather than risk it falling into the hands of Republicans.

Warrants also expire in late 2028, so if the govt wants 80% equity, they must execute them before then. That's the longterm timeline.

To some degree, there's also an incentive to fortify the balance sheets in case of an apocalyptic housing downturn, though the new stress tests say they're OK. But hey, that's what they said in '08 as well.

Yes, the takings case is only near dead. SCOTUS grants writs about 2% of the time, so we're not completely fucked.

Could you share a link? For some reason I can't seem to find this.

ROP cares about an admin's intentions only in regards to how they may have been different in Trump vs Obama.

They certainly don't care about the intent behind implementing the NWS, or about reasonable expectations and arbitrary or unreasonable actions in the way that Lamberth's case does.

The Fairholme v US takings case is dead after the CAFC ruling. Plaintiffs filed a petition for a writ of certiorari, and SCOTUS will determine whether or not to hear the case by the end of the year.

If SCOTUS doesn't grant the writ, it's over and the takings case is screwed.

Concerning the conservatorship itself, the CAFC opinion says that HERA made it impossible for shareholders to exclude the gov't from their property, implying the initial taking happened in 2008 rather than 2012. I don't know how you would assess damages, but either way I expect SCOTUS will reject this interpretation. "Right to exclude" =/= right to property, and they won't allow HERA to supersede the Constitution's Fifth Amendment.

But again, SCOTUS has to take the case first.

but only to the extent of (i) accrued and unpaid dividends...and (ii) Periodic Commitment Fees

but only to the extent of
but only to the extent of
but only to the extent of

I'm literally just asking you if HERA says the principal can be repaid. The text seems to say NO, as long as the funding commitment exists. It still exists. Even if there were abundant capital at the enterprises, the statute doesn't seem to permit a paydown.

I'm not asking how a hypothetical paydown would look, I'm asking you what text in HERA leads you to think that a paydown could even happen?

The government reads this as not allowing paydown. I believe they reference this in their Lamberth arguments.

If this text is to be believed, shareholders can only repay dividends added to the liquidation preference from their circular draws. Paydown of principal doesnt seem to be an option.

So they say DeMarco was not serving in violation of the Appointments Clause, so the NWS challenge is effectively dead. Yet they're remanding to determine damages for the unconstitutional removal restriction for Watt?

Not that I expected anything different, but what does the Appointments Clause actually do? At least the dissent (p.19) seems to get it.

EDIT: Evidently they also left the door open for the possibility that the restriction affected the NWS in some other way, unrelated to appointments clause. Seems like a lost cause.

How do you reconcile your opinion with the text of the actual agreement?



This seems to indicate that if Treasury's funding commitment is still in place--which it is--the companies are not able to repay the loan.

Yes. They denied the statutory claims.



Again, the statutory claims were shot down; SCOTUS doesn't care whether FHFA conserves or not. Instead, the surviving claims are constitutional claims, and the damages concern whether the FHFA director being insulated from presidential removal caused harm.

This case doesn't even seek remedy from reversing the NWS. Plaintiffs are requesting relief in the form of writing down Treasury's liquidation preference on the senior preferred. IMO, even that isn't realistic, since Calabria and Mnuchin let the liquidation preference build throughout the Trump presidency.

IMO remedy should reflect two years of retained earnings that are also added to the liquidation preference, assuming you wanted to create a but-for world where the Trump admin had more time.

FHFA has no fiduciary duty to shareholders; the courts have said as much. HERA allows the agency to act in its own best interests, even if those interests are antithetical to preserving assets or to a traditional conservator's mission.

BOD definitely messed up here, but idk how you sue the BOD.

Personally I don't think it does. I think this is a pretty clear cut takings case, and CAFC dropped the ball.

That said, if SCOTUS doesn't approve our writ, we'll be SOL.

If we're taking about Lambeth, then the breach of contract is between the two contracting parties. Treasury isn't a party, so why would they have to pay damages?

Takings case is a different matter.

I haven't seen any argument that the boards did not approve the conservatorship. Washington Federal says they were only given 24 hours, but doesn't say that they did not ultimately agree.



I think that the bar for proving coercion by the gov't is incredibly high. Paulson's statements about the inevitability of the conservatorship are probably not enough to convince a judge.

I think that both Paulson and the companies understood a conservatorship would help stabilize the enterprises and the broader financial markets during a pretty scary crisis with banks failing left and right. I don't think that the GSE's really understood that HERA--using FDIC language--would interpreted as a blank check for the government to loot the enterprises for 14 years. And I don't blame the boards for not seeing it; took 12 of those years to determine the "or the agency" language gave FHFA essentially unlimited power.

Personally, I think this is going to be almost impossible to prove in court.

They had board approval anyway, so they were "legally" allowed to impose it.

CAFC says the companies consented to a conservatorship where the conservator had extremely broad statutory powers, and consequently they couldn't they can't complain when the government takes all their money. It's not an opinion I personally agree with, but there it is.

Here is a link to the CAFC opinion:

I love the fact that the CAFC characterizes this as an equity dilution as well. If I'm trying to dilute your wine, I don't drink it all before filling your cup with water.

The "right to exclude" point is also suspect, since excluding the government from oversight of your business is not the same as excluding the government from owning your business.

I expect SCOTUS to address this. It's too easy to legislate away property rights, and in this case either CAFC is wrong, or HERA is unconstitutional.

Collins said the NWS was legal. Takings claims only apply to legal actions, otherwise it would be illegal exaction. There is nothing in the Collins ruling that precludes a takings claim.

The government already has the legal right to take anyone's property, but they must still provide just compensation if they do.

I don't think CAFC dismissed takings because of SCOTUS ruling. They had their own stupid logic that property rights are determined by the right to exclude, and that once HERA was written, the companies had no right to exclude the government from their property, including their net worth.

The fact that our SCOTUS shot down our APA claims and said the NWS was within the conservator's statutory authority certainly didn't help us, however.

Because Treasury's funding commitment is still in place, the companies can only pay down unpaid dividends and commitment fees. They cannot pay down principal.

From the SPSPA, 3(a):

This is true until the commitment is terminated, after which:

It's weirdly comforting to know that a billionaire has been suffering through this crap for as long as we have. This is a good lesson in not fighting the government.

Kthomp--like any intelligent investor--is only concerned with probabilities and making money. He is not concerned with what is "fair" like Tim Howard. The gov't will take every nickel they can from these companies for as long as they're allowed to, or until they get a better deal.



Just because Treasury can't do it unilaterally doesn't mean it cannot be done. I don't see why FHFA--on behalf of the companies--can't modify the contract with the consent of both parties. They already did it once with the NWS.

I should check your signature before asking any questions. Lol

Anyone know how long SCOTUS might take to decide on writ for Fairholme v US (takings)?

A few things here. First, I had to look up the rescission thing in Document 148.

Evidently JPS were seeking alternate remedy in the form of returning their shares for par and terminating the contract. FHFA argues that's a distribution of capital barred under HERA. Motion granted in favor of FHFA.

FHFA also argues that shareholders can't prove any harm was done to by the NWS. Reasons are because A) GSE's could never pay down liquidation preference, B) plaintiffs estimate value of future dividends based on but-for world, (i.e. - impossible to quantify), and C) the harm is not necessarily traceable to 3rd amendment (could be attributable to the provision barring repayment instead). Also other hot garbage. Motion denied in favor of shareholders. Will go to trial to determine harm.

One thing I'm a little fuzzy on is the part about "GRANTED insofar as no genuine dispute remains on the fact of harm on the theory that plaintiffs were denied dividends that they otherwise were reasonably certain to receive"

Are they saying that--similar to #1--capital distribution rule barred dividends as well? Or is something else happening here.

High PE ratios are for high growth companies. You're essentially betting future earnings will eventually bring that number down.

GSE's earnings are relatively stable; they will never command a high PE.

I'd be very skeptical of any valuation that A) imagines Treasury will write down the seniors for no consideration, and B) assumes the GSE's will never raise capital.

Couple of thoughts about the Bhatti case:

I don't think the argument for writing down Treasury's liquidation preference holds water. Seems to me that the remedy should be limited to NWS payments from the first two years under Watt. That's the only real impact of the President not having removal authority.

SCOTUS really fucked us on the prospective relief issue. I would love to see a lower court challenge the perception that the NWS no longer exists, since all earnings are still being added to the liquidation preference. Bhatti can't really do anything about this, because Calabria and Mnuchin clearly didn't eliminate it when they had the chance.

Personally, I think the judge (you said Schiltz?) knows this case is bullshit. I wish he'd just disregard the SCOTUS opinion, since our original APA claims actually made sense by every definition of conservator known to man.

We do get this little nugget:

Junior preferred shares. Formerly just preferred, before the government's senior preferred supplanted them.

Alito's opinion is dogshit, so I don't blame the judge. If he rules in our favor just to throw it back in Alito's lap on appeal, I will die of laughter.

Can't tell if you're joking, but in order for P/E to equal infinity, it would mean that either the numerator (price) has to be infinitely large--it is not--or the denominator (earnings) has to be approaching zero.

Basically, it thinks we have zero earnings. I'm reluctant to celebrate.

I think they do. IIRC, the lawsuits were originally ~$200B, but the banks settled for something like $25B. That money was paid to the GSE's and then swept to Treasury in like 2013/14.

Lamberth trial isn't about the legality of the NWS. SCOTUS has already ruled that NWS is legal under their--admittedly stupid--interpretation of HERA and the powers of the conservator. Instead, Lamberth is about breach of covenant of good faith and fair dealing, which is implicit in every contract.

Plaintiffs must show that the FHFA acted in a manner that, while technically legal, was intended to frustrate the shareholders' reasonable expectations under the contract. Plaintiffs must demonstrate:

A) That the gov't/FHFA acted arbitrary or unreasonably in implementing the NWS, as is evidenced by the discovery documents relating to communications regarding the return to profitability, the DTA's, and the fact that they knew the NWS would exceed the 10% dividend going into the future.

And...

B) That shareholders' reasonable expectations before the NWS were that they would share in the reward--be it dividends or share price appreciation--as the GSE's returned to profitability.

Market only looks forward about six weeks. I expect a run-up beginning of next month.

Odds of SCOTUS taking Fairholme v US appeal?

Was this released before, or is it new? I haven't seen it before.

Can I ask why you think this is impossible?

Executing the warrants will have to come before any capital raise scenario anyway, so it seems to make sense to execute early and pocket a few billion more. Is there a downside I'm missing?