Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two privately owned Fortune 50 companies that are currently stuck in a government led conservatorship where the government takes all their money through an agreement between the government and itself. Fannie Mae and Freddie Mac are often referred to as Government Sponsored Enterprises (GSEs). Upon further review of the fight over the production of documents, it can be discerned that the fight is real.
Investment Opportunity: The premise is simple, if you believe that plaintiffs are not making stuff up as they go along and their legal arguments have merit, then it would appear that the government's agreement with itself that over time has resulted in it taking everything is not here to stay. As such, the preferreds would eventually be worth par and the commons would be a multiple of their earnings per share. Combined, the GSEs make $15B/annum and common share valuation estimates by Richard X. Bove and William Ackman are around $20. Personally, I am roughly 90% preferred and 10% common.
Perry Capital Seeks To Enforce At Least Part Of The Law
Perry Capital has filed a reply in support of their motion to supplement the record with the recently made public discovery materials:
Richard Epstein has weighed in:
Treasury took all residual shares for a zero price, and now pleads its own poverty as a defense.
The government has objected to these new documents becoming part of the record. Epstein speaks to the relevance of document production in this lawsuit:
Ironically, it is easy to agree with Treasury that further discovery is not needed, but only because the public evidence is so clearly against them that any further inquiry into the GSEs financials leading up to the NWS is irrelevant.
Although Epstein is right, the reality is that having discovery documents provably demonstrating the falsities of the government's assertions certainly can't hurt plaintiff's case. You can't have too much of a good thing when you've had a Lamberth ruling.
Fiderer's Perspective on Cash Dividends
David Fiderer recently weighed in on the legality of cash dividends, something that I haven't yet seen itemized in any lawsuit. The question raised is whether or not it is legal to pay cash dividends during conservatorship and I think he's right. That being said, no one is disputing it at present, but maybe we see this perspective incorporated into amended complaints filed after Fairholme's discovery is completed. The odd thing about all of this is that a reversal could come out of Perry Capital's appeal before other lawsuits are amended or proceed far enough to drive action. The accounting fraud lawsuits are still working their way through the system, and discovery and the production of Fairholme's Exhibit 1 may result in complaints regarding the entire conservatorship.
Chris Dickerson Claims Privilege On His Own Email
Currently, the government has produced but not handed over thousands of documents. One of the more interesting revelations that I've recently unearthed is that Christopher H. Dickerson is asserting privilege over his own email:
Here is the reference to a document he's asserting privilege over:
Here are some interesting highlights regarding what Chris says may happen if these documents are released:
And finally, here is proof that these are his emails, simply by matching Bates numbers:
That's something to look forward to as potentially released documents as a result of Fairholme's motion to compel.
Summary and Conclusion
There are a lot of reasons to be positive on the GSEs. The documents that have been released so far support the plaintiffs' assertions and that's why the government doesn't want to include them in the record in the DC District Court. From an objective basis, these documents don't seem necessary because the net worth sweep takes everything for nothing so the real legal argument at hand doesn't revolve around what they did or why they did it because anyone can figure that out. The real legal argument is whether a conservator under HERA can take a conservatee's assets without judicial review and do whatever they want with them. Judge Lamberth basically said yes, but he was able to do so using a demonstrably incomplete and misleading set of information provided to him by the government.
That's precisely why I own 4,050 shares of FMCCH, 9,340 shares of FMCCP, 4,442 shares of FMCCT, 5,000 shares of FMCKP, 27,086 shares of FNMFN, 5 shares of FNMFO and 25,092 shares of FNMA.
Disclosure: I am/we are long FMCCH, FMCCP, FMCCT, FMCKP, FNMFN, FNMFO, FNMA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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