Replies to post #608351 on Fannie Mae-No Politics (FNMA)

[kthomp19]

Given all the malfeasance by the UST, Hollihan and the advisors for FNMA are just as likely to negotiate and coordinate a settlement with the plaintiff classes including common shareholders prior to the capital raise.

In the recent past I would have agreed with you. But given Sweeney's ruling allowing only derivative claims to move forward, I am starting to think that the plaintiffs won't need to be dealt with at all.

If only derivative claims survive, then FHFA and Treasury negotiating a 4th SPSPA amendment that unwinds the NWS would moot all of the lawsuits against the NWS. They would all be dismissed rather than settled.

You also miss the fact that none of the cases have been certified as class actions. That means that the individual plaintiffs can be paid off without any benefits accruing to other current shareholders.

There is a fundamental difference here between plaintiffs who hold prefs and those who hold commons. Common holder plaintiffs can only really be paid off with cash, while pref holders can be "paid off" with a generous conversion to common (which costs the companies and Treasury no cash). However, there would be a good reason to offer the same conversion to all other junior pref shareholders (it makes the re-IPO possible), while there is a good reason not to offer the same cash payment to all other current common shareholders (this just wastes money/capital for no reason).

If all interested parties spend all the effort to negotiate the settlement there is no reason that the terms of the settlement would be recommended by a Special Committee of the BOD and ratified by a shareholder vote under Delaware law.

Delaware law has nothing to do with this. HERA says that common shareholders have no voting rights during conservatorship, and federal law supersedes state law when the two conflict.

Calabria said "It has always been my view that an exit from conservatorship is going to require a large capital raise by Fannie and Freddie.", which means that the capital raise will happen at the very end of conservatorship. Which, in turn, means that common shareholders will have no say in the process.

My point stands, and Delaware law does not defeat it.

It does not make sense to me why UST would just settle with the preferred and negotiate the terms of a conversion without negotiating with common plaintiffs and common shareholders.

This will be moot because neither will need to be negotiated with. Also, current common shareholders that are not named plaintiffs do not need to be negotiated with at all.

While this does potentially remove one reason to offer a junior-to-common conversion, there are plenty of others. The fact that the re-IPO investors have a direct monetary incentive to insist on one is chief among them.