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Thanks - Susan Wachter said in 2010 that she thought an interest rate shock was going to cause the next housing crisis. This was part of an hour long FCIC interview - she also mentioned that some "regulators were forcing the GSEs to take on ALT A loans - she would not name names until she went off the record during the last 3 minutes or so.
https://fcic-static.law.stanford.edu/cdn_media/fcic-audio/2010-10-06%20FCIC%20staff%20audiotape%20of%20interview%20with%20Susan%20Wachter,%20University%20of%20Pennsylvania.mp3
Do you think private capital will be foolish enough to provide the first lost capital to public private entities like the GSEs again when SCOTUS just gave legislators a nationalization playbook?
Kthomp and Robert - regarding precedent - what do you think this portends for Farmer Mac? - are there others? How about the implied full faith or is it fool faith? Seems like there is a lot of interest rate risk on the UST balance sheet and all the implied full faith debt - perhaps Congress can change the regulations and then give the HERA power to new regulators to do what they want?
I think Carney got it wrong also because there is not a consensus within the 1st Circuit. The Sisti case ruled the FHFA is a govt actor while the Judge in Montila says it is not. Debra Brown who is a housing attorney has been challenging the FHFA for several years and just filed an Amicus trying to bring up the Collins case for consideration - seems like the 1st Circuit had a hearing on this in May but no final decision. Also seems like the government actor issue can be parsed. Check Bradford's site for the various cases - thanks Glenn!
Didn't the case get reassigned to Hon. Steven Schwartz - a Trump appointee? Not sure if Sweeney has anything to do with this case going forward?
Many thanks to you both for your contributions!!
The reason why this case may be important is that perhaps all the new discovery in the GSEs cases uncovers some juicy proprietary self dealing based off info coming from UST. Dont you think it is possible that someone from the GS prop desk was at the Eaton Park meeting or knew about the Barron's leak. Got to be conflict of interest rules against trading off of US Govt info - especially since there are so many ex GS guys in sensitive Govt positions. Another case where so much time has past but the fact patterns are more relevant that ever because the GSEs have made so much money after the likely dirty deeds.
I think Robert has it nailed in his most recent post. I was reacting to Gorsuch's dissent which I think would have overturned the whole PTAB system. Enough said - my point was to highlight the developments of the Antrex decision today. I think your analysis is right but I am always wary of the swamp and the possibility of a pyrrhic victory.
Here is the SCOTUS Blog summary of the orals:
https://www.scotusblog.com/2020/12/argument-analysis-very-hard-questions-in-dispute-over-fannie-mae-freddie-mac-shareholder-suit/
Probably biggest risk is Breyer "throwing in the towel" and joining the majority on the Constitutional question but moderate in the severability and remedy issue. If Breyer joins the majority maybe Roberts will have him write the Opinion?
Looks like Gorsuch will want the Court to open wide based on his Anthrex opinion.
Overall - I guess we could have had a more severe remedy from Anthrex so perhaps that is why the market is status quo today.
Thats the logic. Thomas just came out with Nestle last week and he has already done 7. I guess it is possible that Breyer would say that the FHFA is different from the CFPB which would probably be our least desired author but who knows since he was all over Nationalization in the orals. The market is probably not moving because they severed the statute and had a targeted remedy. Maybe Barret, Alioto and Kavanaugh will rule the same here assuming that Roberts will never want to rock the boat for SCOTUS comity.
Check out SCOTUS Blog Statistics - Majority Opinions Authored by Sitting.
Alioto, Breyer and Gorsuch have not issued an opinion for the December sitting. Gorsuch has only authored 5 opinions so far so he has 1 - 3 opinions to go. Usually each Justice especially less senior Justices author an opinion for every sitting. The assumption is that Breyer will not change his opinion from Seila so it is either Gorsuch and Alioto ruling that the FHFA Director was unconstitutionally appointed.
Great Point Kthomp - did you notice how he gave a shout out to all the Amicus? . New Civil Liberties is also Amicus in Collins. Doesnt this look like we win on Unconstitutionality at least 6-3?
Agreed - same tone as the Trump appointed Justice Willet. Great stuff - dont see how we loose the Constitutional argument. Lots of reference to Free Enterprise, Seila and even one Humprey's Executor. One of the Amicus cited by Gorsuch is also Amicus for Collins.
I really hoping for a Gorsuch opinion! If it Alioto - it is unconstitutional at least 6-3 - not sure why Thomas did not join the majority but it seems he was laying the ground to reexamine inferior officer appointments in Edmond.
The severability and remedy analysis seems to be the issue and we should have hope that we are dealing with a principal appointment as a basis for a different outcome - will Alioto, Kavanaugh and Barrett go in on the whole enchilada? It seems like Thomas and Gorsuch are ready to roll.
Here is the latest from SCOTUS Blog:
5-4 unconstitutional
7-2 Severable
https://www.scotusblog.com/2021/06/justices-scale-back-unreviewable-authority-of-administrative-patent-judges/
This may mean an Alito opinion on Collins. If it Gorsuch it should be a dandy!
Re - Anthrex - Thanks for the follow up Robert! Looks like they applied the severability analysis but not sure how the inferior v superior officers substantive debate will apply to Collins. I think I really liked Gorsuch's opinion - SCOTUS Blog seems to be coming out with an analysis right now but overall the discussion seems a lot like Willets analysis in Collins case and I really loved all the time Gorsuch spent on the Amicus briefs in Anthrex.
Hey Robert,
Did you see the Anthrex case decision? - lots of reference to Hamilton and Free Enterprise. Trying to digest it and why Thomas dissented. Seems like an important decision regarding the Appointments Clause and appropriate remedy. Maybe the remedy is most important for possible impact in Collins but lots of discussion on different tests for different possible remedies.
They paid $ 550 million to the SEC and others and the GS stock dropped. The plaintiffs are trying to get a class action certified because GS claimed that they managed conflicts and acted in the best interest of their clients. You can see what ProPublica said and there are lots of SEC statements. The core was the fact that they allegedly stuffed clients with MBS securities that they shorted proprietarily. The ABACUS deal happened after Hank left but may have been in the works when Hank or Steel were still with the firm. Hard to believe that Hank was surprised by the mortgage meltdown like he said in the Netflix documentary.
https://www.propublica.org/article/what-the-goldman-sachs-settlement-means-in-context
Hey Rumple
Did you see that the GS case was vacated and remanded back to the 2nd Circuit to review all " record evidence" on whether GS misled investors on it management of Conflicts of Interest between 2006- 2010. Remember Fabulous Fab and the ABACUS deal? Here is what GS disclosed according to the SCOTUS opinion today:
Plaintiffs allege here that between 2006 and 2010, Goldman maintained an inflated stock price by making repeated misrepresentations about its conflict-of-interest policies and business practices. The alleged misrepresentations are generic statements from Goldman’s SEC filings and annual reports, including the following:
? “We have extensive procedures and controls that are
designed to identify and address conflicts of interest.” App. 216 (emphasis and boldface deleted).
? “Our clients’ interests always come first.” Id., at 162
(same).
? “Integrity and honesty are at the heart of our business.” Id., at 163
(same).
Wonder if the "record evidence" has something to do with Hank and the GSEs?
Susan Wachter FCIC Interview - Thanks for the reply. My take away is that if she is appointed this interview is a good insight into her views and perspectives unconstrained by current political realities. Perhaps it could be the focus of confirmation questions?
Take aways:
This is a 2010 interview so perhaps outdated but -
1. Wachter is part of the UPENN - Wharton academic community which Biden was affiliated with. She is also part of Elizabeth Warren's network around Boston and Harvard.
2. She predicted the 2008 housing bubble largely caused by lax underwriting based off of the Japanese and Asian housing collapse caused by similar housing market factors.
3. She predicted that interest rate risk will cause the next housing bubble
4. She mentioned GS and John Paulson and others who were shorting the market as early as 2006 - this flies in the face of Hank Paulson's claim( see the Netflix documentary) that he did not see the housing crisis coming when he was at UST. Also want to mention that GS sponsored ABACUS with J Paulson ( ironically - ABACUS is the subject matter of the current GS v Arkansas suit to be decided next week)
5. She takes the position that the GSEs were partially to blame but also mentions Mozillo at Country wide forcing them to take low quality underwriting to keep market share since the liar loans were driving new market participant inroads.
6. It is unfortunate that the questioner did not get to ask the GSE question earlier but in the last 90 seconds she clearly said that certain "regulators" were pushing the GSEs to take ALT A loans in the particular.
7. She was not comfortable naming the regulators for the public record but seemed willing to continue the conversation off the record with the FCIC interviewers as the interview ended. - Maybe something to bring up in confirmation - who were these "regulators" and why?
Hey Rumple - You might find the 2010 interview with Dr. Susan Wachter from Wharton interesting since she might be the next FHFA head. Unfortunately she only talked about the GSEs in the last 90 seconds of the tape but she did say that the GSEs were being pushed by "regulators" to take ALT A loans before the FCIC interviewers turned off the tape and she went off the record.
https://fcic-static.law.stanford.edu/cdn_media/fcic-audio/2010-10-06%20FCIC%20staff%20audiotape%20of%20interview%20with%20Susan%20Wachter,%20University%20of%20Pennsylvania.mp3
Gorsuch would be the best possible author. Take a look at the Pacific Legal Foundation Amicus - one of Gorsuch's old clerks prior to SCOTUS was the author. The focus should be the roll back of the Administrative State to protect against back door Nationalizations.
Hi Glenn, Do you have a copy of the Amicus brief filed by Debra Brown in the First Circuit?. Your blog post just has the first two pages attached rather than the whole brief. Thanks again for all you do on behalf of GSE Shareholders.
The question is whether the buffoon is the plagiarist and liar who appointed her or is it the new HUD Secretary? Although she may not have much experience to lead HUD she does seem to be serious minded and intent on serving her constituencies.
Great work Robert and Guido! Wouldn't it be ironic if they release the Collins and Goldman decisions on the same day. The Goldman case seems to relate to the ABACUS fraud where GS paid the SEC over $ 500 million to settle.
https://sevenpillarsinstitute.org/case-studies/goldman-sachs-and-the-abacus-deal/
Remember Fabulous Fab! It seems he may be getting a PhD at the University of Chicago. Perhaps he is working at the Paulson Institute part time.
Thanks Rumple,
Perhaps we are talking about the degree of give and take. Tim P to my understanding owns both common and JPS and so does Ackman - I would expect him to advocate for his book which is probably mostly JPS. That being said I dont know where we would be without the Collins plaintiffs and all the other JPS focused plaintiffs including Kaoboy.
Tim P said he thought that the plaintiffs had spent over $ 100 million already which I think we are lucky to possibly benefit from. The SCOTUS case which we all are hanging our hat on is primarily because of the JPS centric plaintiffs - correct.
It is my understanding that Glenn switched from common to JPS but personally I think he should be thanked mostly. There have been some times when I thought he piled on the common but overall I think he is owed a big thank you.
We also owe a thank you to YOU and all the other common stock warriors.
Finally, I would also want to say I will probably sign off for a while and wish everyone on this Board the best of luck and health. I am probably to fixated on this and owe my other interests more attention. GLTA!!
Thanks Rumple,
First regarding whether or not a fund manager should advocate as a shareholder to get the best return for their investors - I would say absolutely Yes!!. This is still a country where it is good to do a job well and make money doing it.
Just think if the American Funds CIO would have been advocating all of these years we may be in a very different place. They manage a lot of 529 plans and there are a lot of kids who could pay for more college if they did advocate as a GSE shareholder.
Regarding Glenn - He has made a gigantic contribution to the cause and seems to be very transparent about his personal investment.
I am probably naive but fortunately or unfortunately I probably would not have held on to my GSE stock for so long if I was not. I think I understand your viewpoints but intuitively I think it is important to be fair and not unnecessarily malign co-investors with different perspectives but a common goal
Thanks for the reply Kthomp
Lets hope SCOTUS completely invalidates the SPS. If they dont - it goes against fundamental fairness that the UST could plant an internal memo that discusses nationalization and wiping out private shareholders in March of 2008 and then use the powers bestowed by a Conservatorship which may have been unnecessary if the UST officials acted ethically.
https://arc.fiscal.treasury.gov/files/pdf/Treasury-Ethics-Handbook.pdf
It seems clear that any sharing of internal UST analysis should not be disseminated outside of the UST and if there is a potential rational reason to do so they should have sought approval from internal ethics and legal departments. We do not know if this internal approval was obtained but if it wasnt then the UST emails disclosed in the FCIC documents show likely malfeasance and breach of ethics.
Under Delaware Law - Can controlling shareholders be enjoined from exercising contractual rights obtained by past unethical or illegal acts?
Doesn't the internal UST memo discussing Nationalization that was planted most likely unethically in the marketplace show the intent for a unconstitutional taking and the price of the stock at the time of the public offering the basis for determining the value of the property unconstitutionally confiscated by the taking?
Thanks for sharing your perspective Kthomp
You are right Glenn - Tim P has been one of the most important advocates for GSE shareholders - he does not deserve to be maligned. You dont deserve to be maligned either - you have done a great service by sharing information and advocating for shareholders. Thank You!
Great Point Guido - You are right. Why did he let any capital go to UST especially since he believes the purpose of the GSEs is to be a countercyclical balance for the housing market. Great point - something he should answer for if and when he is replaced.
Hi Guido,
Thanks for sharing the link. The big takeaway that I heard was that he sees the GSEs primary purpose as countercyclical which is to provide stability to the housing markets when depository institutions can not.
He actually mentioned Berkshire Hathaway as a good example of an institution that has accomplished this.
He seems to relish his role and track record as a prudent regulator which may mean that he would be and advocate for disciplined risk taking and an urgent need for proper capitalization of the GSEs. Perhaps he will be a stronger advocate for recap and release outside the FHFA than in it?
I wonder what he thinks about the actions of the US Treasury during March 2008 and during the NWS? I wonder how he could justify a cramdown of private shareholders now given his past statements at CATO if he is no longer restrained by his role at the FHFA?
Thanks LuLeVan,
Do you think the UST could be enjoined from implementing a cramdown if the SPS is still in place after SCOTUS?
Looking at UST ethics:
https://arc.fiscal.treasury.gov/files/pdf/Treasury-Ethics-Handbook.pdf
It looks like it was a clear violations of Ethics when they sent the confidential information to Barrons in March of 2008. The same UST official who the email was address to was actually chosen to be the new CEO of Wachovia before he resigned his position at UST. I am assuming the FDIC signed off on this. The the then head of the FDIC is now our Chairperson for our BOD.
How can they justify issuing shares at $ 27.50 underwritten by the UST officials old employer just 60 days after the Barrons planted article and now cram down public shareholders?
Hi Kthomp,
I dont understand why you dont think the GSE have been nationalized and that it was the intent of UST to nationalize them.
The Investopedia definition of Nationalization : Nationalization is the process of taking privately-controlled companies, industries or assets and putting them of the control of the government.
On March 8, 2008 - the UST Memo cover email said: "I send it only to help inform potential internal Treasury discussions about the potential costs and benefits of nationalization" It didnt say conservatorship or reorganization or restructuring or bail out but "nationalization"
On July 30, 2008 HERA was enacted based partly or wholy on market instability promoted by the rumors surrounding the Barrons article and its aftermath
On September 6, 2008 - the Conservatorship was imposed on the GSEs giving complete control over the entirety of their enterprises
In August 2012 the Net Worth Sweep was implemented giving all profits to the UST for perpetuity.
You still dont think this fits the definition of a Nationalization?
Perhaps the UST should be enjoined from exercising any rights with the SPS because the do not have "clean hands" under the general principals of Equity.
They definitely contributed to the crisis in the MBS market that was the pretext for Conservatorship by their conversations with MBS market participants and the plant of the Barrons article which was the pretext for nationalization and HERA on March 8, 2008.
It is a open question whether Bear Stearns or Wachovia would have had to be bailed out if it was not for the industry conversations and the Barron's plant the week before Bear failed.
Would the sale of the common and JPS been completed if the market knew UST was advocating a nationalization and had planted the Barron's article?
Would Sheila Bair allowed the UST official who was intimately involved in the nationalization efforts become Chairman of Wachovia if she knew about the Barrons plant and UST memo?
Hi Viking,
As you said, it seems like the claim would have to be derivative and most likely litigated in the Court of Federal Claims?
FNMA stock was sold at $ 27.50 per share on May 8, 2008 and the dividend policy at that time was $ 0.25 per quarter or $ 1.00 per year. The assumption for purchasing shareholders who thought they were part of a viable recapitalization of FNMA was a stock price of $27.50 or higher and income of $ 1 per share. Today that would be worth $ 40.50 in value plus reinvestment income. This would be approximately $47 bn in value which could be used to partially offset the required capital under the capital rule.
I would hope that Sheila Bair who was the head of the FDIC when the capital raise occurred and now is the Chairman of our BOD would concur that this is fair given the actions of the UST prior to the capital raise. If the investors knew that the UST was advocating a nationalization among MBS market participants, the stock offering and related JPS sales would not have been completed.
Hi Kthomp,
Check out this timeline in a March 31, 2008 Fortune article.
https://archive.fortune.com/2008/03/28/magazines/fortune/boyd_bear.fortune/index.htm
It was clear there were rumors swirling in the MBS marketplace before the March 8 Barrons plant. Why would UST add to the turmoil during this time period if they did not want to cause a nationalization?
Why not just agree to a massive LOC for some type of equity negotiated with the BODs of the GSE?
Hi Kthomp,
Here is the link to the " Good to see you this week." email from the CEO of Annaly Mortgage to UST suggesting several recap and restructure ideas for US Treasury.
http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-06_Treasury_Email_from_Michael_AJ_Farrell_to_Robert_Steel.pdf
If the UST did not want to nationalize why plant the Barrons story just two days later and after discussing a recap idea with a major MBS participant?
Hi Kthomp,
Thanks for the reply. Try the link now.
What doesnt make sense is why UST would plant the article unless they wanted to cause a crisis that would lead to the nationalization of the GSEs.
The FCIC public record shows an email from the CEO of Annaly Mortgage on March 6, 2008 - two days before the Barrons plant. In this March 6 email the Annaly CEO thanks the UST for the meeting which happened that same week suggesting a way forward with a recap of the GSEs but rather than move forward with a recap they planted the Barrons article on March 8 and then Bear Stearns failed the next week.
It is crazy but why did the UST let the GSEs sell more common stock and JPS just 60 days after the Barrons plant. FNMA sold over two billion of common and two tranches of JPS. The common was sold at $27.50 per share whereas Treasury leaks a memo suggesting the common was going to get wiped out. Didnt Treasury have a fiduciary or ethical duty to disclose that they planted the story with Barrons before the public capital raise? Especially since the Secretary's old employer was one of the Underwriters?
What was the pretext for HERA? Didnt the Treasury Secretary have an ethical duty to disclose that they had planted a story which led to market instability with the GSE stock? Furthermore didnt the Treasury Secretary have an ethical duty to let Congress know that if they did pass HERA it would be easier to put the GSEs into Conservtorship? I am not sure what Statements were made by Treasury but dont you think the fact that the UST planted a story with Barron's leading to market instability is a material fact that should have been disclosed to Congress?
Hi Kthomp,
What do you think Mr. Thomas meant when he said "..inform potential internal Treasury discussions about the potential costs and benefits of nationalization>" if he did not mean that Treasury wanted to Nationalize the GSEs and that is the reason they planted to Barron's article a week before Bear Stearns failed?
Are you aware of this email?
https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Sorry the first email was March 6th
https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-06_Treasury_Email_from_Michael_AJ_Farrell_to_Robert_Steel.pdf
" Good to see you this week" Meaning the week of March 3, 2008 or the week before the failure of Bear Stearns.
The guy copied on the email followed his boss to Wachovia and a private equity firm before becoming the President of a private liberal arts college in Holland Michigan. This guy also was a co-author of an article blaming the collapse of the GSEs on bad management not mentioning the role of the UST in the fiasco.