Govt’s Fatally Flawed Fannie Argument: Receivership Vs Conservatorship


The first paragraph of the Government’s recent filing in both the Perry Capital and Fairholme Funds is a vivid example of why they have yet to win a single ruling in this case and why their case is so weak:

Providing further proof that no good deed goes unpunished, the plaintiffs in these actions seek judicial relief as a result of the Department of Treasury’s and the Federal Housing Finance Agency’s (“FHFA”) unparalleled actions to rescue and stabilize the Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) (“Fannie Mae”) and the Federal Home Loan Mortgage Corp (OTCBB:FMCC) (“Freddie Mac”) (collectively, “the GSEs”). In September 2008, Treasury committed massive taxpayer funds to Fannie Mae and Freddie Mac, ultimately providing over $187 billion in taxpayer funds (and committing over $258 billion more) to cure their insolvency. Without this capital infusion, both enterprises would have been placed in mandatory receivership. Their failure and subsequent liquidation in receivership would have had dire consequences for mortgage markets and the larger economy

Got it? The argument is, “if we had not done what we did, the entities would have been put into receivership so this case should be dismissed”. This means shareholders can’t complain and should not expect anything in return.

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But there is a flaw in that line of thinking. They absolutely could have put the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s into receivership and liquidated them. They could have done it. The problem is they DIDN’T do it. They put them into conservatorship and by doing so by law have an obligation “to preserve the value of the assets for stakeholders”. What they then did with the 3rd Amendment is to begin to perform a de facto receivership on Fannie Mae and Freddie Mac’s by slowly liquidating them by transferring their wealth to the Treasury. That is a “no-no”.

Receivership and Conservatorship are two VERY different things. There are very different requirements of the Conservator and the Receiver. A receiver receives the assets to dispose of them, the conservator becomes a steward of the assets to preserve them. The two are not remotely related. What the gov’t did with the 3rd Amendment is turn a conservatorship into a receivership. They do not have the right to do that. THAT is that these lawsuits are about.

The government continues to argue “we said we could do it so we did it, end of story”. Unfortunately, there is thing called the rule of law and even our gov’t is beholden to it. This is the reason these cases keep moving forward. I would expect that as long as the government continues to make the same arguments going forward we should see the same results from both Judges.

Gov’t District Court Filing Case 1:13-cv-01053

Gov’t Filing Case 1:13-cv-01025

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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