x**8
发帖数: 1165 | 1 Thoughts On The AIG Ruling And The Implications For Fannie Mae
Jun. 24, 2015 4:42 AM ET | 22 comments | About: American International Group
Inc (AIG), FNMA
Disclosure: I am/we are long FNMA. (More...)
Summary
The AIG trial court has ruled that the government taking AIG Equity was an
illegal exaction but that shareholders are not entitled to damages.
The ruling, while for the government on damages, sets out a road map for
reversal.
Fannie Mae shareholders who owned shares when the net worth sweep was
executed should be encouraged.
On June 15, 2015, Judge Wheeler in the United States Court of Claims issued
a ruling on a bench trial in Star International v. United States, (No. 11-
779C) ("AIG Ruling"). Hank Greenburg, through his interest in Star
International, alleged that the Federal Reserve and the Treasury Department
(collectively, "Government") had no authority to demand 92% of the equity of
AIG in exchange for a pledge of $182B to bail out AIG during the financial
crisis. Consequently, the Government's demands constituted a taking under
the Fifth Amendment for which Greenburg demanded $25B in damages.
The Court ruled that the Government's actions were indeed without authority
but that under the Economic Loss Doctrine, Greenburg was not entitled to a
recovery.
Let's unpack that to discuss some interesting aspects of the ruling itself,
the prospects on appeal and the impact on Fannie Mae shareholders.
The Ruling
In a ruling a court finds certain facts and reaches certain conclusions of
law. The importance of the distinction will be plain in the discussion of
the prospects on appeal.
While a 75 page ruling must of necessity be abbreviated for an article, the
most interesting facts the Court found are:
"Operating as an opportunistic lender of last resort, the Board of Governors
imposed a 12 percent interest rate on AIG, much higher than the 3.25 to 3.5
percent interest rates offered to other troubled financial institutions
such as Citibank and Morgan Stanley."
"[T]he government treated AIG much more harshly than other institutions in
need of financial assistance.
"[T]he evidence supports a conclusion that AIG actually was less responsible
for the crisis than other major institutions."
"The Government did not demand shareholder equity, high interest rates, or
voting control of any entity except AIG. Indeed, with the exception of AIG,
the Government has never demanded equity ownership from a borrower in the 75
-year history of Section 13(3) of the Federal Reserve Act."
"The Government did realize a significant benefit in nationalizing AIG.
Since most of the other financial institutions experiencing a liquidity
crisis were counterparties to AIG transactions, the Government was able to
minimize the ripple effect of an AIG failure by using AIG's assets to make
sure the counterparties were paid in full on these transactions. What is
clear from the evidence is that the Government carefully orchestrated its
takeover of AIG in a way that would avoid any shareholder vote, and maximize
the benefits to the Government and to the taxpaying public, eventually
resulting in a profit of $22.7 Billion to the U.S. Treasury."
"AIG's counter parties also received complete releases from AIG for all
legal action, including any potential fraud or misrepresentation."
"In contrast to the wrongful conduct of [Citigroup, Bank of America, Goldman
Sachs, JP Morgan, and Morgan Stanley], no claims of fraud or misconduct
have been brought by the Department of Justice against AIG for any of AIG's
actions in the years leading up to or during the financial crisis."
Now let's turn to the conclusions of law. The court distinguished between a
"taking," which is the result of the actions of government officials which
are authorized by law, and an "illegal exaction" a payment to the government
based on the unauthorized actions of government officials. "An illegal
exaction occurs when the Government requires a citizen to surrender property
the Government is not authorized to demand as consideration for action the
Government is authorized to take." The court concludes that since Section 13
(3) of the Federal Reserve Act does not authorize the Government to take
equity, the transfer of equity to the Government was an illegal exaction.
So far so good for the shareholders. But, if the Government's actions were
an illegal exaction, what is the measure of damages? This is the ugly part.
The court said: "Common sense suggests that the Government should return to
AIG's shareholders the $22.7 billion in revenue it received from selling the
AIG common stock it illegally exacted from the shareholders for virtually
nothing. However, case law construing 'just compensation' under the Fifth
Amendment holds the Court must look to the property owner's loss, not to the
Government's gain." Thus, the measure of damages is not the Government's
gain under the illegal exaction, but the shareholders' loss. What then was
the loss Star suffered due to the Government's actions?
Here, the Court makes two errors. First error: There were multiple
Government actions, but for the sake of clarity, limit the discussion to two
combines both these actions when it states "[t]he court must examine what
would have happened to AIG if the Government had not intervened." The court
looks to the $85 billion loan and concludes that without the loan, AIG would
have gone into bankruptcy. Since the shares would have been worthless in
bankruptcy, the shareholders were not damaged by the illegal exaction. The
court's error was in combining the loan and the exaction and concluding
since the loan prevented bankruptcy there was no subsequent harm by the
taking of the equity.
This is a clear error. The loan saved AIG from the liquidity crisis and
preserved shareholder value. The Government then stole that value by
illegally demanding equity. The action the court examined should have been
the illegal action of taking the equity, not the legal action of providing
the loan. This should be a compelling argument on appeal.
The court's second error was to accept the trial testimony of experts
opining that in bankruptcy the shares would have been worthless. This is
often true, but not always, especially when the bankruptcy is not brought on
by a failure of the business model but by the financial markets. AIG was a
liquidity based bankruptcy. The intrinsic value of its financial holdings
had not changed. Instead, accounting rules required AIG's assets to be "
marked to market", that is, revalued as if they were sold in the frozen,
artificially depressed markets of the crisis. This is an accounting fiction,
not financial reality. Consider, too, the usual bankruptcy, especially of a
large, complex company like AIG, takes years to resolve. During those years
, creditors are barred from proceeding against the debtor by an automatic
stay. Creditors can certainly file claims with the bankruptcy court, but
absent permission of the court, no creditor can seize assets or realize any
claim against the debtor until a final plan of reorganization is approved.
During the years resolving a major bankruptcy, the markets normalize and
value returns. Thus, the bankruptcy process itself would have protected AIG'
s assets from the "mark to market" fiction of insolvency.
As an example of how this could have worked in reality, consider General
Growth Properties (NYSE:GGP). GGP is a large REIT in the retail mall space.
Its debt came due during the crisis. Its retail properties were performing,
but due to the lack of liquidity, GGP was unable to obtain routine
refinancing. GGP filed a Chapter 11 bankruptcy, took advantage of the
automatic stay and passage of time, secured the refinancing and emerged from
bankruptcy unscathed. I purchased GGP stock during the bankruptcy in the $3
range and later saw the stock soar to $18 (although I sold prior to the
huge gain, I merely doubled the investment). GGP is a striking example that
a sound company insolvent purely because of a liquidity crisis in the market
can emerge from bankruptcy with value in the equity.
The Appeal
Let's turn to the appeal. On appeal, the appellate court will examine the
findings of fact and the conclusions of law. The distinction is critical.
Findings of fact in a bench trial (only a judge, no jury), as here, are
reviewed on a "clearly erroneous" standard. That is, the appellate court
will defer to the trial court as to the facts unless the reviewing court has
a "definite and firm conviction that a mistake has been committed." In my
opinion, the trial court took great care to make sure the facts it found,
including those cited above, were well grounded in the testimony. The sole
exception is the error about the effect of bankruptcy on the equity, which
is a matter of professional opinion. These facts should survive appeal.
This is the more interesting part: an appellate court reviews conclusions of
law, de novo. That is, without any deference at all to the trial court.
Appellate courts are perfectly free to reach different conclusions of law if
not convinced by the reasoning of the trial court. Indeed, unless there is
controlling U.S. Supreme Court precedent, appellate courts are free to
derive new exceptions to existing law or pronounce new doctrines of law.
I think the trial court felt compelled to follow the economic loss doctrine
since that is the law as that court found it. Yet, by taking care to
establish the facts quoted above, and establishing the court's own dislike
of the conclusion, the trial court is providing a careful basis for the
appellate court to make an exception to the economic loss doctrine in an
extreme case such as AIG.
All in all, given the facts and extreme Government behavior, Greenburg has a
fair chance on appeal. The appeal does ask the court to make an exception
to the economic loss doctrine but the outrageous facts should pull on the
conscience of the appellate court for that exception.
Side observation: the Government justified the exaction of equity to prevent
the "moral hazard" of companies taking business risk thinking the
Government would provide a bailout. Over and above the exorbitant interest
rate, the Government wanted to "punish" AIG. Having been an officer of a
publicly traded company, I can affirm that it would be career suicide to
take a business risk relying on the possibility of a Government bailout.
Second, the real moral hazard here is preventing the Government from doing
this in the future. Consider the following quote from the Ruling:
"In mid-September 2008, the Government recognized that the Treasury and
FRBNY might not have the legal authority to take the … stock given to the
Treasury … See e.g., [quotes taken from Government sources presented at
trial]… ('we agree that there is no power' for the Federal Reserve to 'hold
AIG shares'). …('Treasury lacks the legal authority to hold directly
voting stock of AIG'); (Geithner: 'Under section 13(3)of the Federal Reserve
Act, the Fed is prohibited from taking equity or unsecured debt positions
in a firm.'); … ('Nice try on the preferred stock investments! We still don
't have that authority.')"
Now consider the following quotes from the Wall Street Journal after the
above publicly quoted by the Ruling and after the court ruled the Government
had no authority to demand the equity:
"In a statement Monday, the Federal Reserve said it 'strongly believes that
its action in the AIG rescue during the height of the financial crisis in
20008 were legal, proper and effective' A Treasury spokesman said Monday, '
We disagree with the Court's conclusion regarding the Federal Reserve's
legal Authority.'" Wall Street Journal, June 17, 2015, pg C3.
Moral hazard takeaway: The Government stole 92% of AIG's stock, valued at $
22.7B, got off on an error, and is completely unrepentant. No Government
employee has lost position or pension. The true moral hazard is that future
Government officials learn that such conduct creates great career building
headlines for being aggressive but carries no professional risk.
Fannie Mae
Let's apply this to Fannie Mae (OTCQB:FNMA). Fannie Mae is the Federal
National Mortgage Association. There are two lines of Fannie Mae shareholder
suits against the Government. The first line of cases is in the Federal
Court for the District of Columbia, ("Perry Cases") now on appeal before the
Federal Appellate Court for the D.C. Circuit. Those cases allege the
Government violated various Federal and State laws, but do not allege a
taking. The second line of cases ("Fairholme Cases") before the US Court of
Claims do allege a taking. The AIG Ruling only applies to the Fairholme
Cases.
In very brief summary, in September 2008, Fannie Mae was taken over by the
Federal Housing Finance Agency ("FHFA") under the Housing and Economic
Recovery Act of 2008 ("HERA"). FHFA then entered into a preferred stock
purchase agreement ("PSPA") with Treasury as a vehicle for Treasury to make
investments in Fannie to preserve Fannie's solvency. In exchange for
Treasury committing to funding up to $100B to Fannie, the PSPA gave Treasury
1 million senior preferred shares with a total liquidation preference of $
1B ("Treasury Stock"). Second, the Treasury Stock was entitled to annual
cash dividends equal to 10% of the liquidation preference. Third, the PSPA
gave Treasury warrants for up to 79.9% of Fannie Mae common at a nominal
price.
HERA, unlike section 13(3) of the Federal Reserve Act under which Star sued,
does permit the Government to acquire equity securities in Fannie Mae. The
alleged taking in the Fairholme case occurred in August, 2012, when FHFA
executed a Third Amendment ("Net Worth Sweep") to the PSPA which substituted
the 10% dividend for a dividend equal to Fannie Mae's net worth.
Applying the economic loss doctrine to Fannie Mae we ask, assuming that the
Net Worth Sweep was an illegal exaction (or taking), what was the value
taken from the shareholders? The value taken would be any amounts which
Treasury received in excess of the 10% dividend to which Treasury was
entitled under the PSPA. As of June, 2015, some sources calculate that
amount at $20B, and counting.
Fannie Mae Conclusion: The AIG Ruling helps Fannie Mae shareholders by re-
enforcing the economic loss doctrine as the appropriate measure of damages
when the Government seizes property either by a taking or by illegal
exaction. For those shareholders who are members of the plaintiff class, (
click here for more about that) the US Court of Claims should render a $20B
judgment in their favor.
Editor's Note: This article discusses one or more securities that do not
trade on a major U.S. exchange. Please be aware of the risks associated with
these stocks. Less | m*****n
发帖数: 2152 | | N********e
发帖数: 3048 | | N********e
发帖数: 3048 | | x**8
发帖数: 1165 | 5 漂亮的是这个区分：
This is a clear error. The loan saved AIG from the liquidity crisis and
preserved shareholder value. The Government then stole that value by
illegally demanding equity. The action the court examined should have
beenthe illegal action of taking the equity, not the legal action of
providing the loan. This should be a compelling argument on appeal.
打个比方， 如果一个房子着了火，（1）消防队来扑灭了，（2）然后消防队把房子里
剩下的都拿自己家里了。
这是两个事实。威勒的判决，是说（2）违法。 但是不能赔偿苦主，因为要是没有（1
），就什么也剩不下。所以也不用赔偿了。
其中的荒谬，把两个事实拆开以后，就显然易见了。 | G**Y
发帖数: 33224 | 6 法官说的没错
别wishful thinking了
1
【在 x**8 的大作中提到】
: 漂亮的是这个区分：
: This is a clear error. The loan saved AIG from the liquidity crisis and
: preserved shareholder value. The Government then stole that value by
: illegally demanding equity. The action the court examined should have
: beenthe illegal action of taking the equity, not the legal action of
: providing the loan. This should be a compelling argument on appeal.
: 打个比方， 如果一个房子着了火，（1）消防队来扑灭了，（2）然后消防队把房子里
: 剩下的都拿自己家里了。
: 这是两个事实。威勒的判决，是说（2）违法。 但是不能赔偿苦主，因为要是没有（1
: ），就什么也剩不下。所以也不用赔偿了。
| q********g
发帖数: 10694 | 7 呵呵。。。
首先要清楚这个消防队，如果是义务消防队显然还的赔出来。如果是商业打捞公司，而
且沉船的时候，船长兼老板说，只要把我救了我什么都给你。。船老板被救了不到两年
，就反悔了。。
就简单说这么多。深入分析显然不止这些。起码你说的两房25还没看到。呵呵。。
听哥的，闷声蹲坑，闷声发财。。股版来convince，没啥用的。呵呵。。
1
【在 x**8 的大作中提到】
: 漂亮的是这个区分：
: This is a clear error. The loan saved AIG from the liquidity crisis and
: preserved shareholder value. The Government then stole that value by
: illegally demanding equity. The action the court examined should have
: beenthe illegal action of taking the equity, not the legal action of
: providing the loan. This should be a compelling argument on appeal.
: 打个比方， 如果一个房子着了火，（1）消防队来扑灭了，（2）然后消防队把房子里
: 剩下的都拿自己家里了。
: 这是两个事实。威勒的判决，是说（2）违法。 但是不能赔偿苦主，因为要是没有（1
: ），就什么也剩不下。所以也不用赔偿了。
| x**8
发帖数: 1165 | 8 这个我说的不算。你说的也不算。 法官说的才算，等着看上诉吧。
Fannie Mae 也是一样， 最后 Sweeney 说了才算。现在已经在deposition了。等判决
结果吧。
【在 G**Y 的大作中提到】
: 法官说的没错
: 别wishful thinking了
:
: 1
| x**8
发帖数: 1165 | 9 相反吧，Treasury和联储的Action是他们的责任。不能说你交钱我给你救火，或者说我
救火了，你欠我的。
25不是我说的。FNMA的问题是OTC，如果不relist，天天还是被玩
【在 q********g 的大作中提到】
: 呵呵。。。
: 首先要清楚这个消防队，如果是义务消防队显然还的赔出来。如果是商业打捞公司，而
: 且沉船的时候，船长兼老板说，只要把我救了我什么都给你。。船老板被救了不到两年
: ，就反悔了。。
: 就简单说这么多。深入分析显然不止这些。起码你说的两房25还没看到。呵呵。。
: 听哥的，闷声蹲坑，闷声发财。。股版来convince，没啥用的。呵呵。。
:
: 1
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