Fannie Mae-No Politics (FNMA)

[10bambam]

This stock is all about patience. Fannie Mae - '4 Documents, Produced In Discovery' Dec. 19, 2014 11:14 AM ET | 4 comments | About: Fannie Mae (FNMA), Includes: FMCC
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in FNMA, FMCC over the next 72 hours.Summary
•Documents produced in discovery by the Defendant are now being used by the Plaintiff against the defendant. This suggests that discovery is unearthing valuable documents for the Plaintiff.
•If 100% of the profits of Fannie and Freddie continue go to the US Treasury in perpetuity, bankruptcies and receiverships can be less lucrative for creditors than conservatorships.
•Although the Iowa case isn't looking good and Judge Royce Lamberth set a precedent, the end-game and over half of my portfolio is to be long Fannie and Freddie.
•The government's proposed defense is more logical and understandable than the Plaintiff and this perpetuates an untenable situation, namely conservatorship.



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Sweeney's Court of Claims Redacted Filings

As expected, Fairholme's discovery is producing documents that are now being used against the government in a court of law.

“
On November 17, 2014, Plaintiffs Fairholme Funds, Inc., et al. filed their opposition to Defendant's recent motion to stay all proceedings.1 Because Plaintiffs' Stay Opposition referenced,attached, and briefly discussed four documents, produced in discovery by Defendant, Fannie Mae, and Freddie Mac, that had been designated by those entities as Protected Information

Specifically, check the bottom of page 16 and you'll see that discovery has already produced documents showing that the government indeed was cooking the books to justify the sweep.

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For example, analyses that were prepared in July 2012 on the basis of the Treasury "scenarios" projected, inexplicably and suspiciously, much lower net income for Fannie in subsequent years-approximately a 50% reduction for most years-than had internal Treasury analyses that had been prepared only a month earlier, in June 2012. Compare T3847 (June analysis) (attached as Ex. C) with T3889 (July 2012 Treasury analysis) (attached as Ex. B). Again, documents produced thus far by the Government do not purport to explain or justify all of the differences between the scenarios. The production of such critically important documents will cause little if any burden to the Government."

"The Government's failure thus far to produce many of the financial projection documents discussed above is especially curious in light of the fact that many documents produced in third party discovery (by Fannie, Freddie, and their auditors)

Note that this filing is in response to the government's motion to stay all proceedings. In my opinion, it's been too late for the government to get away with staying the proceedings with the discovery well underway. My disclosure here is that I have firsthand experience modeling data flows across hundreds of electronic discoveries. The government's battleship is sunk, not to mention that Sweeney has herself proclaimed that the government's defense is "schizophrenic" and that the Plaintiff will have their day in court.

Iowa court case gets rolling

After watching the courtroom videos in the case of Continental Western vs. FHFA that you can watch here, I think that the government is making a better case, even though the law is on the Plaintiff's side according to someone who wrote the law. See what they say for yourself.

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"Treasury cannot simply strip the companies of cash in perpetuity"

Michael H. Krimminger is a partner at Cleary Gottlieb and a former general counsel to the FDIC. He says that "the continuation of the sweeps through the conservatorships is a violation of every principle established in bankruptcy and in the more than 80 years of FDIC bank resolutions. And it has no support in HERA." He goes on.

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The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA.

If you feel like the conservatorship is less advantageous for equity owners than receivership or liquidation, well, so far it looks like that's the case

Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two government sponsored entities, not government owned entities unless the Third Amendment net worth sweep is used to set a precedent. This precedent, if set, undermines faith in one's ability to own any American business. Michael H. Krimminger puts it in more specific language.

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The continued diversion of Freddie and Fannie's profits to Treasury misuses HERA as well as ignores the international standards underpinning all insolvency frameworks. This is important because one foundation of corporate finance, and our system of commercial laws, is that insolvency law assures creditors that the remaining value of the company will be paid out under defined priorities. If this standard is ignored, as it has been through the Treasury sweeps, it will undoubtedly affect future investment in housing finance and the financing costs for businesses.

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Not to worry! Mr. Krimminger says that HERA imposes duties on the FHFA as conservator. In this role, the FHFA is instructed to return Freddie and Fannie to "a sound and solvent condition" and to "preserve and conserve the assets and property" of the companies.

It's a long bumpy road ahead, but worth it nonetheless

If you follow headlines, the two enterprises borrowed $187.5B and either has paid back nothing or $225B. According to the Third Amendment, they have paid back nothing because, unlike a liquidation or wind up situation, in this conservatorship the government is not limited to merely getting paid back what was loaned but gets all future profits to infinity and beyond. I'm surprised that senior creditors around America haven't figured this out and pushed for conservatorship instead of Chapter 11. It's the wolf in sheep's clothing.

In the Iowa court room, from what I've seen, Charles Cooper for the plaintiffs centers his dialog on points of weakness like he is defending against a government attack, namely that the conservatorship is supposed to conserve and preserve instead in planned response to the government's focus on the words "wind up." This is, in my opinion, not a critical perspective. He also spends too much time talking about the history of the GSE's, also irrelevant to the legal decision from my perspective. Below is the list of things that are relevant to the case that matter if you ask me. I will be referencing HERA, the body of law that governs FHFA.

1. The title conservator is not a misnomer.

“
12 U.S. Code § 4617

(B) (D) Powers as conservator

The Agency may, as conservator, take such action as may be-

(I) necessary to put the regulated entity in a sound and solvent condition; and

(ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.

2. Whether or not the FHFA can enter into legal contracts, wind up, or end conservatorship is not in question, it can, but Third Amendment is an agreement outside of the powers of conservator as defined in HERA, directly above.

3. Conservatorships run this way are better for creditors than receiverships as infinite cash sweeps that don't impact liquidation preference are preferable to merely getting paid back what you put in. If the Third Amendment is not declared illegal and reversed or amended, winding up operations through receivership is what will happen as the net worth of the enterprises reaches zero in 2018 per the terms of the amendment, at which point the US Treasury would still have $187.5B of liquidation preference.

Iowa Judge Robert W. Pratt Shows Promise

I'm not confident in the Iowa case. As a shareholder, this is disheartening, but that's because I would prefer to have at least a million dollars now rather than in a few years in conjunction with a multi-year, multi-court appeals process. I'm no lawyer, but I don't think you have to be to understand what is happening here. Fortunately, the judge seems to understand that both the Plaintiffs and the defendants agree that for the most part the case should be decided upon a reading of the statute.

The Government's position is "Read the statute." The judge paraphrased the plaintiff's position on behalf of the plaintiff and I concur, "I have read the statute and they've violated it," to which the Plaintiff's attorney Charles Cooper says, "That's music to my ears." Meanwhile, here I am wondering why exactly the judge is the one that has to state the obvious when it would seem that Charles Cooper is in a position to make this beyond self-evident in short order but from what I've seen has failed to do so.

The bad news is that Judge Lamberth has already done the dirty work of creating the legal reasoning that gets around what the law was designed to do according to Mr. Krimminger so if Judge Pratt wants to run with that line of reasoning, it's doable. The good news is that the plaintiff's attorney Charles Cooper made all of the remarks necessary including but not limited to demonstrating that at this point in the process what he says must be taken as fact by law.

Ackman continues to build position, $20+ valuation

As I've previously discussed and Ackman has publicly demonstrated, absent the net worth sweep, Fannie and Freddie are both worth over $20. More recently, he has disclosed that he continues to build his position saying that, "people realize that Fannie and Freddie are more essential today than they were even 5 years ago" and that "of all of the companies that have emerged from the crisis the only ones that are a risk to the taxpayer today are Fannie and Freddie ... cause the government every quarter takes the money and it helps the government meet the budget deficit and it's a false profit because there's no capital cushion left at Fannie and Freddie. The only way for this business to protect the taxpayer is for it to recapitalize. The only way for that to happen is for it to be returned to the private sector." So there you have it. Take it how you want to take it.


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http://seekingalpha.com/article/2768895-fannie-mae-4-documents-produced-in-discovery