Monday, April 15, 2019

Fifth Circuit and other meanderings...

GSE Scuttlebutt and other Informa$ion, some interesting!!

First off, I have a tiny clarification to last week’s blog, where I mentioned the world might hear a decision from the Fifth Circuit Court “in the next couple of weeks.”
That was accurate, but it also was pure guesstimate/speculation on my part.
Nobody knows when we will hear a Fifth Circuit decision and nobody knows the parameters of same—although a decision indeed could be coming shortly.

From this point on in this blog, I am practicing-without-legal-portfolio, SINCE I AM NOT A LAWYER, a factoid I will reduce to an acronym for my future blog purposes (“AAFL” or “ain’t a *&^$#@^” lawyer”).
Court Cases
In the shareholders wet dream, the Fifth Circuit Court will find the federal government guilty of an APA violation or possibly “takings” under the Constitution. The remedies are more vague and multiple but—if the sweep is ruled illegal--one form of relief might be Treasury writing checks to Fannie and Freddie for their past payments over and above what they would have paid under HERA’s original pre-sweep dividends (2012). That development could mean payments of @$60 Billion for Fannie and $45 Billion for Freddie.
But the same decision could end the sweep but produce a tax credit which would wipe of the Treasury’s senior preferred, leaving Fannie and Freddie with future tax credits of @$10 Billion each, but could open the way for profits staying with the companies to build capital.
Part of my conjecture is will the WH want to engage in any operational step that adds to the deficit immediately, which check writing post Fifth Circuit decision to the GSEs would do?
If the judges decide for the plaintiffs (the shareholders), the Admin could appeal to the Supreme Court or—if the judicial resolution and financial hit to Treasury was more attractive to the government--possibly because it was consistent with some aspect of its Mnuchin/Phillips/Otting/Calabria GSE fix, which now might need the ideologically unstable Larry Kudlow’s blessing--the government might accept the court’s ruling and seek to implement it.
If the Fifth Circuit decides in favor of the defendants, the federal government, the logical legal procedural remaining to the GSE crowd is an appeal to the Supreme Court, which may or may not agree to hear the case.
If the Administration opposes the Fifth Circuit’s decision and chose to appeal, while it sucks, I expect the “Supremes” will hear the case in a heartbeat.
Big Kahuna, indeed!
The stakes involve maintaining Fannie and Freddie in some measure of their original form, doing what they do best for the people of the United States—or swapping over a long time—a mortgage financing arrangement everyone knows for a scheme they don’t.
Not to mention the billions of dollars at stake when and if, a court finally decides on the legality of the “sweep, “issues still present even if the Fifth Circuit doesn’t favor the GSE forces.
Let me dwell on a more propitious near term outcome, a court finds for the GSE plaintiffs which includes true Fannie/Freddie operating space and real capital generating capacity.
Note, this could come either from a favorable (Fifth Circuit or even SCOTUS) court decision or from an Admin plan removing Fannie and Freddie from Conservatorship and recapitalized. Fresh capital could come from legal damages accrued, future earnings not offset by weird federal obligations, or just fresh GSE stock issued.
In this example, don’t look for the GSE opponents to walk away empty-handed. Those forces are too DC present and give too much campaign money to totally be stoned by the process, judicial or political. That’s especially true if we get a regulatory plan, where the Trump Admin it can decide winners and losers.
Someone in the GOP/trade association cabal will attach some obstacle, limitation, or handcuff to any GSE freedom.
Don’t ask why, it just always happens.
(Good time to point out a quote from Paul Muolo in last week’s Inside Mortgage Finance, when discussing the GSEs, he called them “the straw which stirs the mortgage banking industry drink.” It’s a fact and makes me/you/one wonder, why the MBA, then under David Stevens and now, Bob Broeksmit, always can be found in rank opposition to the GSEs on any variety of issues????)
Related/Unrelated—Maloni on “Clean Political Kills”
The reason for what I just wrote is that there are very few clean political kills or one-sided wins in DC, although every DC lobbyist (including this former one) will swear they produced or help secure one or more.
Where that was true, they were small compared to the issues discussed here and the massive dollars and systemic changes implicit—the nation’s $10 Trillion mortgage finance system and billions of dollars embedded in the remaining lawsuits against the Treasury, not to mention ongoing efforts to try and replace the GSEs with something which won’t be as efficient or fair, will be more costly and not as good for consumers (who vote!!), and predictably will get screwed up in implementation.
Think “Obamacare” and how clean that was and is.
My point being, Washington never does anything simple, neat, and starkly correct.
I hate to skewer more windmills for the good guys, but think of what I’ve written when you see those discussions of hoped-for GSE stocks prices in the hundreds.
Remember, before I get any complaints about 5th Circuit or share prices….AAFL!!

Maloni, 4-15-2019