Monday, October 6, 2014

Lamberth Casts First Stone; Today's Blog Heavy


Judge Lamberth Says What???


So, Judge Royce Lamberth dismissed a major suit against the Treasury and FHFA, when he opined the Congress gave the two total authority to do whatever they wanted to/with Fannie and Freddie.

However, the challenges don’t stop with Lamberth.

The Perry Capital plaintiffs (Ted Olsen from Gibson Dunn) already have announced plans to appeal and other “takings” lawsuits—which are a major part of the public spectacle about the GSEs—continue before Judge Margaret Sweeney, albeit slowly.

For the stakeholders who want F&F to exist and function in a future US mortgage market, this setback isn’t desirable but it definitely is not dispositive and doesn’t much change the issues facing the Congress, although you can bet that the Administration/Department of Justice will try and use Lamberth’s opinion to stop or slow down the other cases it faces, as well as flog the finding on the Hill. 

Appeal in Works

I’ve talked to several lawyers who believe Lamberth’s decision is ripe for the appeal and won’t survive a DC Court of Appeals review. 

(An appeals court plaintiffs’ victory would send the case back to Lamberth, asking him to review his specific legal errors.)

One point hit by most of those is how can Lamberth argue that the underlying legislation—The Housing and Economic Recovery Act of 2008 (HERA), meant to conserve and revive the two entities for full functioning--is served when Treasury takes every penny F&F earn, not allowing them any revenue for recapitalization? 

Using a tortured construction, Lamberth failed to measure the Treasury and FHFA performance against the existing “arbitrary and capricious” standards, suggesting that FHFA’s protection against the same magically covers the Treasury as well, a fact which appellant judges might see as a major reach and a Lamberth error. (See NYT link, Fiderer segment, and Kim material.)

As a non-lawyer, I thought Lamberth’s opinion was pretty stark and simplistic, as if he took the easy way out and chose not to engage the implications of the Treasury actions (with the FHFA—the statutory conservator--playing “Tonto the enabler” to the Treasury’s “Lone Ranger”).

I can’t turn the chicken crap Lamberth decision into chicken salad, but most people assumed and still assume that this matter ends up before the Supreme Court (which is why you hire David Boies and Ted Olsen) and a final decision will take a long time. 

Preferred and Common Fall, but Why?

F&F common and preferred stock, at one point,  lost more than 50% of their value this past week, after losing a lot previously (causing me to wonder if the Lamberth decision somehow leaked out several days before it was announced?).

But—given the Congress’ difficulty restructuring them legislatively and F&F’s solid business in the most recent quarter—to some those current prices will seem like a buying opportunity at a low basis.

I’ve said that F&F preferred and common trade on whim, opinion, hopes and fears of judicial and legislative action, not necessarily the fundamentals which drive other stocks (despite the fact that F&F business volumes—including recent 3Q MBS levels--and low loss projections are pregnant with earnings promise).

As long as those judicial and congressional options/opportunities are alive, you’ll have myriad sellers and buyers.

Fiderer on the Lamberth Decision

(I asked David Fiderer one of our favorite writer/researchers, who also is a lawyer, to comment on Judge Lamberth’s ruling.) 

Judge Lamberth says plaintiffs ignore the plain meaning of the statutes, which, according to his reading, virtually exempts FHFA’s actions from judicial review, (except for any violation of the Constitution).  To arrive at his conclusion, he ignores the plain language of the statute, and imagines that FHFA has certain rights that are specifically proscribed. 

To me Lamberth’s most revealing sentence was buried in footnote 20:

“There surely can be a fluid progression from conservatorship to receivership without violating HERA, and that progression could very well involve a conservator that acknowledges an ultimate goal of liquidation. FHFA can lawfully take steps to maintain operational soundness and solvency, conserving the assets of the GSEs, until it decides that the time is right for liquidation. See 12 U.S.C. § 4617(b)(2)(D) (“[p]owers as conservator””

That fluid progression toward an ultimate goal of liquidation appears to be a figment of Lamberth’s fertile imagination, which he uses to rationalize FHFA's move to drain all retained earnings from the companies.  Look at the text:

(D) Powers as conservator

The Agency may, as conservator, take such action as may be—

(i) necessary to put the regulated entity in a sound and solvent condition; and

(ii) Appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.

So long as FHFA is a conservator, it is not allowed to take actions that are antithetical to that role. Nothing in the text suggests that FHFA can take actions to facilitate liquidating the company before FHFA has been formally designated as a receiver. Again, this is clear from the language of the statute:

(E) Additional powers as receiver

In any case in which the Agency is acting as receiver, the Agency shall place the regulated entity in liquidation and proceed to realize upon the assets of the regulated entity in such manner as the Agency deems appropriate, including through the sale of assets, the transfer of assets to a limited-life regulated entity established under subsection (i), or the exercise of any other rights or privileges granted to the Agency under this paragraph.

The reason why the text says what it says should be pretty obvious. A conservatorship devolves into a receivership for a liquidation only after a formal assessment has been made that the conservatorship cannot achieve its goal, which is restoration of the GSEs’ soundness and solvency.  Until that point, FHFA has no right to compromise the GSEs’ soundness and solvency in pursuit of a liquidation. In fact, under the statute, such action would be illegal.  I cannot imagine anyone with a background in finance, business or law who might think otherwise. 

 (Note: Fiderer told me the other day that he now is available to work—as a “hired gun”-- on the banking and GSE issues he’s studied and written about for years. Email me if you want to reach out to DF, an outstanding financial intellect and broadsider.)

Michael Kim Reviews Lamberth’s Ruling

The very capable Michael Kim of CRT Capital LLC did a client summary and review of the Lamberth decision, putting it in the context of other “Third Amendment” lawsuits.

Not being able to link it (because I lack the technical skills), I am going to refer readers to Michael’s work with which, not surprisingly, I agree. I believe that F&F advocates, as well as those supporting the lawsuits, will find MK’s stuff very useful and informative.

As we have done in the past when I don’t have the capacity to provide Michael’s material, directly, I believe Mike will provide it to those who seek a copy; Contact him at 

Headline: Kim thinks there are weaknesses in the Lamberth finding which the appeal will exploit. 


What Stuff Might Happen in Congress?

If Lamberth had ruled for the plaintiffs, we might feel better, but it wouldn’t end the Hill’s self-created “Fannie/Freddie dilemma” saga.

Let’s look at Congress, again.

First off, I am sticking with my prediction that nothing definitive occurs legislatively with F&F until at least 2017 when we have a new President. 


Airing the anxieties, let’s examine worst case.
Assume after November, the House GOP majority grows and the Senate, barely, flips to the R’s and Dick Shelby (R-Ala.) becomes the new Senate Banking Committee (SBC) Chairman in 2015.
A GSE supporter’s most common “legislative” worry, next year, is Shelby moves some version of the CWJC (CorkerWarnerJohnsonCrapo) bill, renamed “the Shelby-(add name).” in honor of the most senior SBC D who signs on, and convinces HBC Chairman Jeb Hensarling (R-Tex.) to accept the Senate bill in conference, once Hensarling gets his own legislation through the House and Shelby successfully gets his bill through the Senate.

As reminder, the Hensarling bill removes the federal government entirely from the mortgage market, leaving it all to “the private sector” which means the large banks. The CWJC nee Shelby bill phases out F&F, keeps the feds in, creates a new government agency to insure banks against securities losses, and puts everything, including the remnants of F&F on budget, to the tune of $5.3 Trillion in further red ink.
I know I always say you never should say “never,” but this scenario ain’t going to happen, boys and girls. Never! 

House and Even an R Senate Won’t Agree on CWJC 

The gulf between the leading House and Senate mortgage reform legislative proposals is much too wide.

The House R’s won’t sign up for anything that keeps the federal government in the mortgage market as significantly as CWJC proposed and also keeps Fannie and Freddie alive for an indeterminate number of years (from five to fifteen),

I think Dick Shelby is too pragmatic to rush a bill through the Senate, into conference and then abandon it to accept just what the other chamber approved.

Mainly, because a GOP-run Senate would not have the 60 votes necessary to override a certain Obama veto of Hensarling’s remove-the-government- from housing finance, at least not without the R’s tacitly kissing off the 2016 presidential and congressional elections, plus R control of the Senate and maybe the House, too.

I’d love to see Karl Rove proclaiming, “Hey people, support the GOP candidates in 2015-2016 because we’ve succeeded in taking away your low cost, long term fixed rate mortgages.” 

Flip side: With as many House R’s who claim they dislike Fannie and Freddie, I don’t think the House GOP Caucus will go for any plan which keeps a heavy federal presence in the mortgage market—even in a vehicle phasing out F&F over some period--just to have some other federal government agency signing Uncle Sam’s name to mortgage guaranties.
The nonpartisan truth, which the GOP leadership should know, is that our mortgage markets are too critical to screw up; they still have to function, can’t take a hiatus,  and everyone—no matter their political persuasion—wants mortgages available at reasonable rates and the accompanying robust economy, jobs, disposable income, business activity, stability, tax revenue, etc. etc.  

I’m From Missouri, Show Me! 

For me, the bottom line—until I see something dramatically different—is the Senate, even under GOP control, would want the federal government present in the mortgage world to insure 15-30 year FRM, whether that means F&F or some red, white, and blue substitute.
Then you have the House’s (misguided) will and votes wanting Uncle Sam out of markets as soon as possible.
That standoff stays until a new President possibly fashions a compromise in 2017, which means most interim action will be regulatory.

What Others Are Saying 

In the NYT, Profs Discuss Lamberth

(They see gaping appeal targets, too.)

Naturally, the W Post Likes Lamberth

Geithner, Bernanke, Paulson Testify on AIG

Your credit score is what, Mr. Berdunkee?

Is Jack Lew Part of the Housing Problem?

Treasury Secretary Lew often talks like a big time Republican especially when he dumps on F&F. Somebody should remind him who the government turned to the last time it was aghast that minority families were getting shut out of homeownership. (Jack, come out of your Ivy covered tower and use some of your political smarts, for the most part those aren’t GOP constituents being shut out of the market.)

Housers Criticize Mel Watt?

SCOTUS R’s Behavior Is So Obvious…. 

Speaking about having a negative impact on minorities, look at the Supreme Court.


More on Dick Shelby

I wrote last week about my “friend” Sen. Dick Shelby (R-Ala.), who could be the next Senate Banking Committee (SBC) Chair, if the GOP wrestles control of the Senate away from Democrats this November. Shelby is a prodigious fundraiser and possesses a major $17 Million political war chest.

The Washington Post’s Al Kamen looked at some reported items from Shelby’s campaign spending. BTW, if Dick becomes the next SBC Chair, watch “the Chairman” grow that $17 Million quickly.


Did the Fed Protect Goldman?


American Banks Are Doing What? (Hey guys, how about trying business or mortgage lending?)


Maloni, 10-6-2014





Anonymous said...

Re: Shelby and other congressmen.

The only thing that matters is if new reform proposals coming out of committees will be more shareholders' friendly, in my view.

Will they be with Shelby?

Bill Maloni said...

Anon--That's a tough read.

Again, let's assume a Senate GOP, Shelby as SBC Chair, and more House R's.

Those should be positive for investors.

Shelby always has been sympathetic to big business, the banks, and big donors.

That's also true in the House.

But for some reason, the hedgies have a pariah stigma in DC.

If they can "get over" with Shelby (again, assuming he's SBC Chair), he can help them.

But their industry needs a champion since--facts to the contrary--they often are labeled as bottom feeders, other more colorful descriptions, and not worthy of broad support.

Maybe their trade associations need logos/ads with snuggly kittens, puppies, and smiling senior citizens in them. Oh and lots of US flags.

Anonymous said...

Hi Bill,
Please check the recent article from WSJ: Fannie & Freddie: No Looting Here. In the article, the author states..."At the end of the second quarter of 2012, the companies were on the hook for $19 billion of dividends annually. Fannie had never earned enough in a single year to pay its $11.7 billion dividend in cash. Only once had Freddie earned enough to pay its dividend". After these years in conservatorship it seems the GSEs had paid only the dividends but not the principal. Are you aware if conservatorship's loan terms were made public?

Bill Maloni said...

Anon--Not sure if I am answering your question (give me an article citation and I'll look at it), but........

For the first two years or so of the conservatorship, F&F didn't have the income to pay their 10% debt service, i.e. their Dividend to Treasury) on the money they had been given and thus had to borrow the money from Treasury to pay Treasury! (I've many times noted that banks had to repay their TARP money at a 5% rate.)

That added roughly $40 Bil to the money that had been infused in the two of roughly $145 Billion.

When both started earning money, in 2012, aided by utilizing their deferred tax accounts, in two years, they repaid the combined $187 Billion--crudely, debt service plus principal--and have been adding more each quarter, so that now they have repaid @$207 Bil to Treasury.

If that doesn't answer what you asked, then let me know.

I believe that terms of repayment have been "public" and that was what changed with the "third amendment," when the 10% dividend was changed to a total sweep of all earnings.

This is what the majority of the law suits against Treasury and FHFA now concern.

Anonymous said...

I wrote in other places where lamberth equated conservatorship to receivership.

As the biggest problem. This giving unlimited powers to liquidate the entities (ie. net worth sweep) did.

I commend you and others for picking up this writing. This is at odds with duties of conservatorship and i would as fhfa to resign. Since they have violated their mission to conserve they must go.

I see the good some government actions are, common defense, monetary policy (trade), and I put in there the concept of a few more things that frankly the federal government does best. Sure the states could do some of it, but mostly the feds do best and should continue wiht fannie and freddie. So, as a conservative i back them; while my other beliefs are against many "social engineering" no one forces you to get a mortgage, but its more of an option that provides affordable opportunity. This is different than something that is mandated upon you - like obamascare; which is the devil incarnate.

I just dont see the business purpose of fnma going away.

First Anon.... JD

Bill Maloni said...

First Anon--I plan to post some things in my next blog, which raise--in my mind--the possibility of a slow change on the subject of F&F, in part because of the recognition of how truly, truly difficult it would be to transition away from F&F into an entirely new model.

Now for this to have any wind behind tis sails, it would mean across the board in Washington--D's and R's--get some religion of how mortgage lending really gets done and why these silly and why the partisan/intellectual barriers they erect (no matter which part) are really meaningless when you understand how important, vital, and productive the nation's mortgage finance system has been and can be.

In that context, the means to that desirable end is far closer with a F&F than it is with CWJC new FMIC or Hensarling's just the banks doing something on their own.

Anonymous said...

Bill, I agree. It is time to move on and develop a new model for Freddie and Fannie. Clearly, over the past few years, no satisfactory substitute for F and F has been devised.
We need some macro analysis of the contribution a reformed F and F could contribute to the national economy.

Bill Maloni said...

Anon--While that would be helpful, nobody would believe the numbers since everyone employs
reports and data to support their positions.

Yes, a core report by a reputable source helps, but after that it needs lots of support like that provided by an Administration or senior members of the HBC and the SBC and then stakeholders.