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Gov’t Finally Responds to Fairholme Suit
Posted by: Todd Sullivan (IP Logged)
Date: December 11, 2013 08:01AM
Here is the gov’t response to Fairholme:
Gov’t response RE Fannie-Freddie
The gov’t case to dismiss boils down to this:
A- Court of Federal Claims is the wrong court
The government also has some material fact wrong in the filing. They state:
The problem with that is that in the Fairholme suit, none of that applies and the argument is irrelevant (Fairholme was not even a preferred shareholder until 2013). At no place in the suit does Fairholme challenge the Conservatorship. The issue is the 2012 Sweep Agreement. Further just because they are not challenging the conservatorship itself does not mean the Sweep Agreement is then somehow validated. Shareholders at that time (2012) had a reasonable expectation based on every public comment from officials that the main goal was the rehabilitation of the GSE’s. The net worth sweep agreement effectively ended at the rehabilitation of the entities as they can never rebuild capital with their net worth being taken each quarter. THAT is what they are arguing.
In all reality the Net Worth Sweep weakened the GSE’s rather than “conserving” or rehabilitating them which is a direct violation of the conservatorship. Without the ability to build capital or repay the Senior Preferred Shares held by Treasury, they will forever be dependent on the Treasury for support. THAT is the taking. It isn’t the loss of shareholder value or dividend, (in fact I don’t see Fairholme argue that anywhere) it is that the entire enterprises were effectively absorbed into the Treasury. When Fairholme speaks of dividends, they speak of the GSE’s ability to begin to pay them again given their current financial condition absent the Net Worth Sweep. Not past ones. Much of the defense here defends arguments Fairholme never makes.
The gov’t even has a problem with their claim they have “all shareholder rights”. See the preferred share agreement:
Because the gov’t elected not cancel or suspend these shares, the shares should maintain their rights. The gov’t can’t have it both ways. If they want to use the FDIC as an example, and if this was the goal, then trading in the shares should have been suspended pending a resolution of the GSE’s.
The gov’t in their filing quoted the FHFA’s statement on Sept 2008 many times to seemingly back their motion but seem to have left this gem out:
Quote:In 2012 it was clear that the entities were in fact “stabilized” and soon would begin producing significant profits (record profits as it turned out). It was then the FHFA and Treasury enacted the Net Worth Sweep. Shareholders had every right to rely on official statements from both the Treasury and FHFA (Treasury Secretary Paulson’sstatement) that the conservatorship would end when the entities were stabilized. .
So, how do we figure this out? I don’t think the judge can simply dismiss because the line between regulator/government/shareholder here are so blurred and intertwined. Perhaps we depose some folks to see just how much influence Treasury had in the initial decisions masking process? Did FHFA step outside of its defined and stated goals at the behest of anyone in the Treasury? Congress? If so it can then be argued that the action was in fact the governmental action and not simply a regulator functioning in is role.
I also found it interesting in its 50 page motion not once did the gov’t admit the GSE will have paid back the entire amount advanced to them by Q1 2014.
Fairholme’s response is due Jan 9th
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