GSE Plaintiffs Assemble New Evidence Into Telling Story And Submit To Perry Capital Appeal May 31, 2016 8:33 AM ET| Glen Bradford..... Summary .....
-- Evidence produced by discovery suggests that the third amendment net worth sweep was put into place because the GSEs were too profitable.
-- Lawyers representing plaintiffs suggest a Perry Capital Appeal ruling will come late June or early July.
-- Behind the thousands of documents plaintiff lawyers still haven't seen, there may be even more evidence supporting plaintiff arguments.
A government-sponsored enterprise (GSE) is a financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent, and to reduce the risk to investors and other suppliers of capital.
The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors primarily by reducing the risk of capital losses to investors: agriculture, home finance and education. The two most well-known GSEs are the Federal National Mortgage Association, or Fannie Mae (OTCQB:FNMA), and the Federal Home Loan Mortgage Corporation, or Freddie Mac (OTCQB:FMCC).
Investment Opportunity In Brief:
Whether or not you agree with the imposition of conservatorship, FHFA accounting at the GSEs, the Net Worth Sweep, or other actions FHFA has taken during its time as conservator, they all still happened. Fannie Mae and Freddie Mac are in conservatorship where all their capital is being appropriated to the US Government.
If this remains to be forever the case, equity shares are worthless and agency-backed mortgage backed securities are being put at risk in the event the GSEs need to draw and the United States is currently facing one of those situations where Budget Constraints put programs on hold.
In the event that the GSEs are allowed to retain capital, equity shareholders stand to benefit. Bill Ackman and Richard X. Bove are targeting $20 on the commons, which seems reasonable if the shares are diluted 80% and the companies combined earn $15B/annum.
The Beginning Of The Endgame
In 2008, their regulator, the Federal Housing Finance Agency (FHFA) put them into conservatorship even though they had their highest levels of capital in history. Before conservatorship, James Lockhart said they were adequately capitalized and pointed out the accounting interpretations should not drive capital requirements:
When conservatorship was imposed, however, an agreement was made between the government and itself on behalf of the GSEs to do just that. From the imposition of conservatorship to before the implementation of the net worth sweep, FHFA issued Treasury GSE preferred securities per the terms of the agreement by writing down GSE assets. After writing down assets as much as they could as systematically as they could for as long as they could, it became obvious that you can't pretend valuable assets are worthless forever.
The net worth sweep was then put into place and the events surrounding the net worth sweep are specifically what discovery productions in the Court of Claims have been looking to learn more about. Overall plaintiffs allege for a variety of legal reasons that the Third Amendment "Net Worth Sweep" is a sham transaction where the government negotiated with itself to take something for nothing.
A New GSE Story Submitted In Court Backed By Hard Evidence Undermines Government's Public Narrative
On May 25th, after Oral Arguments, Plaintiffs submitted the most telling story line assembled to date regarding the events surrounding the Third Amendment and this was all made possible by Fairholme's discovery and the other lawsuits asking for access and Judge Sweeney ruling favorably for the Plaintiffs and against government secrecy:
Note that plaintiffs are still waiting on thousands of documents that they have asked the government to produce that currently are disputed.
Recently Unsealed Robinson Complaint Highlights
With the recently released GSE discovery documents being made public, so too has the entire unredacted Robinson complaint. There's some overlap with the recent Perry capital filing, such as the "too profitable" language:
The Robinson complaint goes beyond just the net worth sweep and targets FHFA's accounting:
The Robinson complaint suggests that the net worth sweep is the most brazenly lawless act ever taken by executive branch agencies:
Lastly, when profits were inevitable, the Net Worth Sweep was implemented to prevent the GSEs from retaining capital:
Remember that if the MDL fails, Judge Thapar will issue an order on the government's motion to dismiss within 30 days of receiving notice of the MDL Panel's decision. It's game time. Summary and Conclusion
Plaintiffs in lawsuits against actions taken against the GSEs during conservatorship have begun using evidence produced demonstrably proving that actions taken during conservatorship were designed around nationalizing the GSEs. The remaining outstanding issue simply is whether or not nationalizing two Fortune 50 companies without paying their shareholders for them is legal under HERA. Lamberth's dismissal has been interpreted by some news outlets as conforming to societal expectations that the government can legally make it up as they go.
I have read HERA, all of the lawsuits, and all the publicly available arguments anywhere and everywhere that I can get my hands on and my interpretation is that the net worth sweep will come to an end sometime, and as such, the GSE equity shares have value. I have 4050 shares of FMCCH, 9340 shares of FMCCP, 4442 shares of FMCCT, 5000 shares of FMCKP, 34461 shares of FNMFN, 5 shares of FNMFO and 25092 shares of FNMA.
I bought commons in case the entire conservatorship gets unwound and over $100B of accounting-based cash transfers to Treasury are reversed along with the warrants being cancelled. I expect that the preferreds eventually are worth par or close to it depending on prevailing interest rates and investor-backed expectations, it's just a function of time.
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