The Government Makes a Bizarre Argument in Fannie Mae Case

The Government Makes a Bizarre Argument in Fannie Mae Case
Fannie Mae / Federal National Mortgage Assctn Fnni Me FNMA and Freddie Mac / Federal Home Loan Mortgage Corp FMCC

Fannie Mae – This is truly strange stuff…….truly.  One looks at this and can only think that our government is operating under the “let’s throw a bunch of shit against the wall to see what sticks” doctrine of legal defense.

From the Fannie Mae filing:

Pursuant to Rule 12(b)(1) of the Rules of the United States Court of Federal Claims (RCFC), defendant, the United States, respectfully requests that the Court dismiss the claims of plaintiffs Fairholme Funds, Inc., the Fairholme Fund (collectively the Fairholme hedge funds), and all other plaintiffs who did not own shares in Fannie Mae or Freddie Mac (the Enterprises)1 on August 17, 2012, the date of the alleged Fifth Amendment taking in this case. These plaintiffs lack Article III standing to maintain their takings claim because they did not own the property alleged to have been taken until many months after the alleged taking occurred.

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The government is saying that anyone who bought shares after 8/17/2012 should have their cases dismissed because they “lost nothing” post 3rd Amendment (ie: “Net Worth Sweep”) which required “all future earnings” of the GSE’s would be diverted to the Treasury.

Peter Chapman writes:

The argument is nonsense.  In America, the bundle of rights that attach to a security do not change based on the identity of the holder.  Here are some legal citations for that proposition:

— In re Lorraine Castle Apartments Bldg. Corp., 149 F.2d 55, 57-58 (7th Cir.), cert. denied, 326 U.S. 728 (1945) (“[T]he prices which security holders pay for their securities in no wise affects the measure of their participation in reorganization or their voting power.”);

— Standard Gas & Elec. Co. v. Deep Rock Oil Corp., 117 F.2d 615, 619 (10th Cir.), cert. denied, 313 U.S. 564 (1941); and

— Security-First Nat’l Bank v. Rindge Land & Navigation Co., 85 F.2d 557, 561 (9th Cir.), reh’g denied, 86 F.2d 3 (9th Cir.), cert. denied, 299 U.S. 613 (1936), reh’g denied, 300 U.S. 686 (1937) (“The legal value or property right in an obligation is the right to recover from the maker to the entire extent of his promise to pay.  The consideration given for a security by the holder thereof is immaterial.”).

A copy of Judge Firestone’s Textainer Equipment Management decision on which our Government relies is available at and is easily distinguishable from the shareholder claims asserted in Fairholme v. U.S.

Chapman is right. When companies want different rights attached to securities, they create different classes (preferred, common, class A, Class B etc). You can’t have different rights attached to the same class of securities. This is especially so because the argument here is that the NWS, which takes all future earnings is happening to those who own the stock today, not just those who sold it before 8/17/2012.  This is a continual taking and has and is happening to all those who owned the stock on 8/17/2012 and all those who have, currently and will own it after that date.

Fannie Mae – Judge Firestone writes (emphasis mine):

Capital argues in response that the government, by taking physical possession of its property for use by the military, has established a per se taking and that there is no basis for reconsideration of the court’s previous determination of taking liability.

The court agrees with Capital and declines the government’s invitation to reconsider its earlier ruling. Regardless of whether the government’s actions may also be characterized as a tort, the critical issue in this case is whether the government is liable for a taking of property. Contrary to the government’s contention, the fact that the government’s behavior might also give rise to a tort claim does not alter this result. See City of Monterey v. Del Monte Dunes at Monterey, Ltd., (“The city argues that because the Constitution allows the government to take property for public use, a taking for that purpose cannot be tortious or unlawful. We reject this conclusion. . . . When the government repudiates this duty, either by denying just compensation in fact or by refusing to provide procedures through which compensation may be sought, it violates the Constitution. In those circumstances the government’s actions are not only unconstitutional but unlawful and tortious as well.”). The court finds that the government is liable for a taking in this case because the government did appropriate Capital’s containers for a public benefit in the form of continued military use.

The principle distinction between a tort and taking relates to the purpose of the government’s action. A tort is intended to remedy an injury to property without regard to public benefit. See Ridge Line, 346 F.3d at 1355 (discussing distinction between a taking and a tort). A taking, incontrast, turns on whether the government has acted for a public benefit. Moden, 404 at 1342 (citing Ridge Line, 346 F.3d at 1356). Here, the undisputed facts demonstrate that the government decided to keep Capital’s containers for a public purpose.

How does this compare to the Fannie Mae case? Did the government “take” shareholder property for “public benefit”? Most assuredly they did. The monies taken from the Fannie Mae has been used by our government in a variety of ways, none of them by them way consistent with the Fannie Mae conservatorship doctrine of “preserving and protecting the assets”.

Did they provide “just compensation” or “provide procedures in which compensation can be sought”? No, and in fact they specifically set out and said there is no redress by shareholders  or any other entity claiming injury as their actions are “beyond judicial review” (the rub here is plaintiffs are claiming the gov’t violated HERA which means judicial review is necessary).

The post The Government Makes a Bizarre Argument in Fannie Mae, Freddie Mac Case appeared first on ValuePlays.

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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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