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I emailed Mr Kim and he was nice

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kabanch   Tuesday, 08/19/14 10:59:51 AM
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I emailed Mr Kim and he was nice enough to send me this report. Haven't had time to read it yet on my way out the door. $$FNMA$$

Michael Kim, Managing Director and Partner (203) 569-4368•
?? Yesterday, we attended the status conference in Washington D.C. for the takings case. See below for a recap of this hearing.
? Plaintiff counsel asserted that despite the court order, the government is taking the position that it has no obligation to respond to over half of current document requests. Defendants did not invoke executive privilege under these requests and no motion
to compel has been filed yet with the court describing plaintiff’s litigating position.
? Plaintiff counsel noted that the following two document requests are examples of failure to respond under the discovery order
and counsel stressed that these requests get to the heart of the issue at hand yet the government has taken the position to not respond to these requests thus far:
o Document Request 13: Any and all documents relating to FHFA’s determination that it is obligated to maximize Treasury’s
return on its investment in the Companies or otherwise prioritize the interests of taxpayers.
o Document Request 17: Any and all documents reflecting communications relating to the Net Worth Sweep between FHFA
and/or Treasury, and: (a) Fannie and Freddie Boards of Directors and Executives, (b) The Companies’ lawyers; (c) The
Companies’ auditors; (d) Rating agencies or other market analysts.
? Defendant counsel responded by noting that many of these document requests do not fall under the February 26, 2014 court
order in terms of subject matter permitted as part of discovery. Following defendant counsel’s response, plaintiff counsel pointed out that the government did not specifically mention that they intend to respond to these outstanding document requests and further noted that that there are eight additional requests that have yet to be fulfilled as well by the government.
? ElectronicallyStoredInformation(ESI)Reports
o Both parties used initial “hit” reports to identify search terms that needed to be narrowed given the search had generated
way too many results.
o The government noted that the ESI currently includes 19 custodians and over 50 search terms.
o Plaintiff counsel noted that more recently, the government has refused to provide these “hit” reports.
o The government’s response seemed to express concern that providing this log would only result in plaintiffs submitting
motions to compel on many of these documents and also appeared to claim plaintiffs were seeking some sort of oversight
over the discovery process.
o Judge Sweeney noted that in many other cases before her, the government has turned over these reports. Even plaintiff
counsel argued that it was customary to do so and that there does not seem to be any precedent case where these reports were not provided. That being said, Judge Sweeney did not rule on this matter from the bench and suggested a motion to compel could further explore the topic and that the court would rule following any submission of such a motion.
? DocumentProductionUpdate
o While the government had previously expected document production to be completed within a month, they have now
revised that estimate, noting that it will now take at least four more months to complete this process as the revised custodians and date ranges significantly increased the volume of documents subject to review for responsiveness and privilege.
o To date, roughly 1,900 documents have been produced under the discovery order but roughly 85% are publically available documents (largely SEC filings and other public documents) and that only 15% of the document production is characterized to be internal documents.
o Plaintiffs have made document requests directly to the GSEs and have received some requests already. One of the GSEs plans to provide a batch of documents this week.
o The government intends to produce the next batch of documents next week and also plans to produce its first privilege log next week as well (this has not been done to date).
Please find important disclosures on page 3 of this report.
?CRT Research | GSEs (Fannie Mae, Freddie Mac) GSEs (Fannie Mae, Freddie Mac)
August 14, 2014
? Court Order for Future Status Conferences (Issued After the Status Conference)
o Parties shall file a joint status report no later than Friday, September 5, 2014 describing the date by which jurisdictional
discovery should be completed
o The court will resume its practice of conducting status conferences every two weeks if the parties deem to be appropriate
o A joint status report should be filed with the court no later than 10:00 AM ET two business days before each status
conference, indicating the following:
? Thedesiretohaveastatusconference
? Summary description of the topic areas to be discussed
? The names of the attorneys in Fairholme Funds who will be participating in the status conference, along with whether
they will appear in person or by telephone
? The names of the attorneys in the other Fannie Mae / Freddie Mac cases who intend to observe or listen to the status
conference, along with whether these attorneys intend to observe in person or listen by telephone
CRT Observations
? We find that yesterday’s status conference hearing sheds more light on what investors can expect in terms of the upcoming timeline of events, which we believe is a step in the right direction. With regards to the document production timeline, we were not surprised to learn that it would take another four months as we had already assumed that jurisdictional discovery would take roughly six months (given ongoing negotiations over the custodians and search terms for the ESI reports). That being said, we believe the timeline will become even clearer over the next few weeks (i.e. document production under jurisdictional discovery, timing of potential depositions, topics for discussion during future status conference hearings, etc.).
? Judge Sweeney insisted that a discovery timeline needs to be agreed upon and urged both parties to negotiate the timeline in the coming weeks.
? There appears to be disagreement over the scope of the document requests under the discovery order as the government has taken a different read of the February 26, 2014 court order and plaintiff counsel will look to file a motion to compel within the next week.
? Lastly and more importantly, we found Judge Sweeney’s closing comments to be the more noteworthy development from yesterday’s hearing. Judge Sweeney emphasized that the whole purpose of this exercise is to allow plaintiffs to have their day in court and to have the opportunity to explore whether or not the U.S. government (i.e. Treasury, Congress or even the Executive Branch) directed FHFA to take certain actions regarding the Third Amendment. Judge Sweeney stressed to defendant counsel that if FHFA took orders from the U.S. government, regardless of the branch, then “that information has to be brought forward” even if it is subject to the protective order and not publically available.
?GSEs (Fannie Mae, Freddie Mac) (FNMA, FMCC)
Page 2
?CRT Research | GSEs (Fannie Mae, Freddie Mac) GSEs (Fannie Mae, Freddie Mac)
August 14, 2014
?GSEs (Fannie Mae, Freddie Mac) (FNMA, FMCC)
Key Investment Risks
? Future mortgage finance reform may not include GSE privatization
? Super Senior Preferred benefits from a Net Worth sweep calculation, which does not allow the GSEs to build capital on the balance sheet
? Transition plan reliant on availability of private capital
? Legislative and regulatory action may alter the future status and role of the GSEs
? At present, conservatorship is indefinite in duration
? Termination of conservatorship requires Treasury’s consent pursuant to the Purchase Agreement
? Sensitivity to interest rates
? Rebound in housing may be premature
The recommendations and guidance expressed in this research report accurately reflect the personal recommendations and guidance of the research analyst principally responsible for the preparation of this report
No part of the compensation received by the analyst principally responsible for the preparation of this report was, is or will be directly or indirectly related to the specific recommendations and guidance expressed in this report. Direct or indirect analyst compensation may be based on performance- related considerations associated with the recommendations and guidance expressed by the analyst in this report
The research analyst primarily responsible for the preparation of this report received compensation that is based upon CRT Capital Group LLC’s total business revenues, including revenues derived from CRT’s investment banking business
????Expected rate of return on investment at current prices levels is above that rate required, in CRT's view, to undertake the attendant risks perceived- positive risk/reward investment balance.
??Fair Value
??????Expected rate of return on investment at current prices levels is in line with that rate required, in CRT's view, to undertake the attendant risks perceived- equitable/reward investment balance.
???????Expected rate of return on investment at current prices levels is below that rate required, in CRT's view, to undertake the attendant risks perceived- negative risk/reward investment balance.
???Ratings Percentages As of August 14, 2014
?????Percentage of Banking Clients Within Each Rating Category As of August 14, 2014
??Buy 62.69%
???Fair Value 35.82%
???Sell 1.49%
????Valuations are based on estimates using traditional industry methods including, inter alia, analysis of earnings multiples, discounted cash flow calculations and net asset value assessments. Price targets should be considered in the context of all prior CRT research published in connection with the subject issuer, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets. Risks that may impede achievement of the stated price target, if any, include, but are not limited to, broad market and macroeconomic fluctuations and unforeseen changes in the subject company’s fundamentals or business trends.
This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is based on information obtained from sources believed to be reliable but is neither guaranteed to be accurate nor intended to be a complete statement or summary of the securities, markets or developments referred to in the report. Recipients should not use this report as a substitute for the prudent exercise of their own judgment. Any opinions expressed in this report are subject to change without notice and CRT is under no obligation to update or keep current the information contained herein. CRT and/or its directors, officers and employees may have or may have had interests or long or short positions in, and may at any time make purchases and/or sales as principal or agent, or may have acted or may act in the future as market maker in the relevant securities or related financial instruments discussed in this report. CRT may rely on informational barriers such as “Chinese Walls” to control the flow of information situated in one or more areas within CRT into other units, divisions or groups within CRT.
Past performance is not necessarily indicative of future results. Options, derivative products and futures are not suitable for all investors due to the high degree of risk associated with trading these instruments. Foreign currency rates of exchange may adversely effect the value, price or income of any security or related instrument described in this report.
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?Page 3
?CRT Research | GSEs (Fannie Mae, Freddie Mac) GSEs (Fannie Mae, Freddie Mac)
August 14, 2014
©2014 CRT Capital Group LLC. All rights Reserved. The Copyright Act of 1976 prohibits the reproduction by photocopy machine or any other means of all or any portion of this issue except with permission of the publisher. 262 Harbor Drive, Stamford, CT 06902

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