Fannie Mae-No Politics (FNMA)

[LuLeVan]

The interesting thing about the Lamberth jury trial is not the trial itself, or the peanut payments to shareholders (which have yet to materialize). Much more interesting are the unintended side effects.

FHFA, the government, and Lamberth were apparently so confident of victory that they did not carefully plan for the consequences of losing. The dilemma they now face is that, for legal reasons, they cannot pay the plaintiffs (hence the oral motion by FHFA's attorneys). The payout would constitute a distribution of capital, which is illegal in conservatorship.

The scope of this legal dilemma is potentially far-reaching. It is even possible that the January 2021 Letter Agreement (Mnuchin, Calabria) must now be deemed unlawful because the SPS LP that the government granted itself therein also constitutes an unlawful distribution of capital (violation of the Charter Act). Not to mention that the SPS LPs are accounted for as off-balance sheet items.

As a result, the Letter Agreements could be on shaky legal ground as of the 2012 NWS. Lamberth is about much more than breach of contract and the peanuts to be paid as compensation.

In fact, the lack of a final Lamberth ruling may be good news in disguise. Perhaps the current rumor that the conservatorship will be terminated is more than just fake news from stock price pushers.

To get out of this legal mess, FHFA and the government could resort to some sort of preemptive defense. Ending the conservatorship may be the most elegant solution because it sweeps the legal mess of the past under the rug.