Fannie Mae-No Politics (FNMA)

[kthomp19]

I'm a little confused about what remedy would look like for our takings case.

Our?

There are several takings cases. Judge Sweeney dismissed the direct claims (and thus all lawsuits that were only direct claims, like Washington Federal) and allowed the derivative claims to proceed to trial.

I would suppose it hinges upon on whether the claims are direct or derivative? If derivative, the $$ goes to the corporations and if direct it could--potentially--go to shareholders?

Right. But direct claims damages will only go to those in the sought class (Washington Federal's is only shareholders of record on September 5 2008) if the class is certified, and only the named plaintiffs if it isn't.

I believe the Owl Creek and Wazee lawsuits are the only two that seek to have current shareholders (what they call "successors in interest") included in their classes. Those cases were dismissed by Judge Sweeney because they included only direct claims, but the US Court of Appeals for the Federal Circuit could reverse that dismissal.

In the latter case I have to imagine damages would be related to lost dividends, or does it hinge upon share price depreciation?

The latter. Common and junior pref dividends were always discretionary.

When determining a takings or illegal exaction award, the only thing that matters is what the property owner lost, not what the government gained. Judge Wheeler, in the Starr/AIG case, cited no fewer than four Supreme Court opinions reinforcing this fact.

In addition, page 9 of this paper regarding takings awards says:

Indeed, if the taken property is of a kind regularly traded on an established market, the Court has held that the prevailing market price is the sole measure of just compensation.

That means that the only relevant measure of what a takings award can be based on is the drop in share price from just before to just after the complained-about action. For example: if Treasury exercises the warrants and the common shares drop by $0.50, that (perhaps plus some interest) represents the maximum legal liability Treasury would face. What Treasury later sells the shares for would be meaningless.

Personally I think the claims are derivative.

Some claims are, some aren't. The ones that are will go to trial with Judge Schwartz (who took over for Judge Sweeney in the FnF cases) in the next year or two.

Should I assume they are not barred by the succession clause as they're constitutional in nature?

Right. The government tried to argue that "Congress stripped the shareholders of the right to bring derivative suits by including in HERA a succession clause". In section 2 of Sweeney's ruling on the Fairholme motion to dismiss (p. 43), Sweeney shot that argument down.

Am I way off base?

Impossible to say, since all you did was ask questions! (insert :-P emoji)

Any insight into how this could all play out, and how it could affect different share classes? Just trying to wrap my head around this.

I believe the direct claims are basically nothingburgers for anyone who isn't a named plaintiff. Class certification could change things, but only for those who held shares on September 5 2008 (Washington Federal) or current shareholders (Owl Creek and Wazee), and that's only if Sweeney's dismissals of those suits are overturned and those suits eventually result in a payout. I think that's a difficult parlay.

The derivative claims have a real chance to force Treasury to write a $125B check, and that would be a real political black eye. Two mitigating factors are that we are at least 2-3 years (trial, appeals court, petition for cert to the Supreme Court) from Treasury having to actually cut that check, and that Treasury has a way to recoup 79.9% (warrants) to 99.9% (senior pref conversion) of that money.

The Supreme Court's Collins ruling means that the senior prefs are only going to go away if Treasury wishes them to. That's going to mean a conversion to common (to recoup that $125B) rather than just a writedown with nothing in return.

The outlier case here is Perry, in Judge Lamberth's court. That case is the only one with FnF themselves as named defendants, and damages in that case would accrue to current (rather than historical) junior pref shareholders because Lamberth ruled that rights to damages travel with the shares. The plaintiffs also seek 6% of par per year since the NWS as damages, leading to a potential 150% or more for all current junior pref holders. I'm not sure how to handicap the odds of this happening (probably not great), but at least that case will have a trial next year.