Fannie Mae-No Politics (FNMA)

[obiterdictum]

The argument in this lawsuit is the most complete of all the lawsuits filed. This is due in part that it was filed well after the third quarter 2013 and contains financial and administrative information not available to plaintiffs who filed in July 2013 and it seeks specific treatment of the monies paid in under the net worth sweep, something not done by the Perry Capital suit.

Thus, it contains action memorandums that recently became available with the public filings of portions of the FHFA and US Treasury administrative record related to the conservatorship and third amendment to the PSPAs, currently available GSE financial information (3rd quarter 2013), and requests that net sweep monies paid in the past be used in specific and alternative ways.

The suit specifically requests that:
* the US Treasury return to the FHFA (GSEs) all dividend payments made under the Net Worth Sweep or, alternatively, recharacterize a portion of such payments as a pay down of the liquidation preference and a corresponding partial redemption of the US Treasury’s Senior Preferred Stock rather than as cash dividends or, as a final alternative, recharacterize the Senior Preferred Stock so that its liquidation preference is eliminated and it is considered junior in priority to the GSEs Junior Preferred Stock for purposes of dividends and the right to payment upon liquidation.
* the US Treasury make no further payments to the GSEs from the US Treasury,
* the FHFA does not make requests to draws from US Treasury to pay cash dividends,
* the FHFA and US Treasury to completely and utterly eliminate any actions related to the Net Worth Sweep,
* that the FHFA in all its agents do not act on any instruction of the US Treasury or any other agency of the Government re-interpret the duties of FHFA as conservator under HERA
* the US Treasury transfer dividends to the Junior Preferred Stock shareholders all contractually-due dividends for each quarter when a dividend based on the net worth of the GSEs was paid to US Treasury, from July 2012 to the present.

The argument makes some points that will have some difficulty sticking. For example, it is argued that that US Treasury has control (controlling shareholder) over the business operations of the GSEs (The US Treasury argues the contrary) due to the Senior Preferred Stock being de facto equal to common stock because the net worth sweep took alldividends/profits in the name of the Senior Preferred Stock (page 9, para 18). However, Senior Preferred Stock by agreement and SEC standards has no voting or controlling powers over the business operations of the GSEs. So changing the Senior Preferred to Common will be done by arguing in court and on paper. This will be a very stiff challenge, to say the least. However, there are mentioned other evidences of US Treasury non-statutory control over the FHFA and GSEs that will support the fact that the Net Worth Sweep bulldozes the rights of both the Preferred and Common shareholders in favor of taking all profits.

Also, the liquidation preference in force by regulation and agreement demands that junior preferred be paid before common. The assumption made by the Plaintiff is that the Senior Preferred is de facto common stock because of the net worth sweep that took all profits with none distributed to Junior Preferred or Common. By doing so, the Senior acts like and becomes Common Stock with out dividend return limits (preferred stock has limited percentage on dividend returns, common stock has no such return limits) and leap frogs over the Junior Preferred by acting as Common Stock. So, the Plaintiff hopes to recoup monies due to the junior preferred on the basis that the order of the liquidation preference was violated and the Junior Preferred lost its returns.

This is a definitional leap that will require some pretty fancy footwork in court and an intelligent judge willing to redefine stock 101 fundamentals. This means that Senior Preferred Stock that is clearly defined in the PSPA agreements has the judge running a line running the center of "Senior Preferred Stock" and penciling in "Common Stock." This argument is designed to get dollars for the Junior Preferred. The US Treasury and FHFA are in trouble legally nonetheless. The Net Worth Sweep leap-frogs or bulldozes. Both are bode bad for the Defendants.

The weak point of the filing from the view of the common shareholder is that it is mainly concerned with the financial interests of the Plaintiffs who are junior preferred shareholders.

This document is a must read from beginning to end for all those interested in the future of Fannie Mae and Freddie Mac.

Source: CONTINENTAL WESTERN INSURANCE COMPANY,
Plaintiff,
vs.
THE FEDERAL HOUSING FINANCE AGENCY, in its capacity as Conservator of the
Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation,
MELVIN L. WATT, in his official capacity as Director of the Federal Housing Finance Agency, and
THE DEPARTMENT OF THE TREASURY,
Defendants.

https://docs.google.com/viewer?a=v&pid=forums&srcid=MDUxNDQwNjExMTIwMzQzNjc3NDIBMTMzOTU5MDE4MzE5MzUzNDExNjABSGM0eTNDbzlzamdKATQBAXYy

Justia Docket Info - The Iowa US District Court, Southern Districr, Central Division (DesMoines) is slow to post.
http://dockets.justia.com/docket/iowa/iasdce/4:2014cv00042/51533