This is a final follow up on my recent posts, Fannie and Freddie: The NWS and the Implied Covenant of Good Faith and Fair Dealing and Some Further Thoughts on the Implied Covenant.
Thanks for all your insightful analysis. What do you think the remedy would likely be if the shareholders win this case? Would it be paid to the companies or to the shareholders directly? Would it be equal to (or based on) how much the government has been overpaid as a result of the Third Amendment relative to the original deal with a 10/12% dividend rate? Would there likely be a discount/haircut to that? Or would it be based on something else?
the complaint seeks expectancy damages, which would be such as to put plaintiff shareholders where they would be if the GSEs complied with covenant. so I would not expect any dividends as damages because I dont believe plaintiffs can prove that it would be reasonable for them to expect dividends to be paid rather than omitted. but par of junior preferred should be available...now how effectuated? simplest way is to nuke the senior preferred, which gets all of the junior preferred to par.
in theory yes, but I fully expect that if plaintiffs win, the parties will agree to a result that traces through where the companies would be without the NWS...and this would be easiest to effectuate by killing senior preferred and having treasury give a credit of the overage in sweep dividends treasury received compared to what it would have received with no NWS...it is in all parties interest to eliminate senior pref to do the "re-IPO" and this would be a prelude to that
That makes sense. The remedy should reflect the undoing of the economics of the Third Amendment, whatever form that may take. I just wonder if there is a way the shareholders win the case, but they end up not actually getting the benefit (or they don't get the full benefit). What are your thoughts on that? What else, if anything, is required in order for the shareholders to actually succeed (e.g., for the junior preferreds to trade at approx. 100% of par value)?
judge could always determine that plaintiffs expectancy going into conservatorship was much lower than par (because all hell was breaking loose, or some such), so plaintiffs could win on merits but "lose" on damages
ROLG - thanks for that explanation regarding the reasoning behind the existence of the implied covenant. I admittedly have read many contracts over the years and don't believe I've received as good of an explanation!
I do have a question regarding the GSE litigation that I would appreciate your insight, if you are so inclined. I think I recall in some context earlier in the Lamberth related case a pleading or ruling that essentially spoke to, either implied or expressly stated, that a shareholder of the GSEs should have known or at least contemplated that ownership of the GSE shares was "different" (than say owning Apple) given the nature of the GSEs (that the charters provide or come along with a public policy or mission). I may be wrong, but I took that as saying 'you as an owner of the junior preferreds' need to recognize that this publicly traded security (that has a special charter to carry out a public mission) may incur certain conditions that require or warrant appointment of a conservator or receiver which represents additional inherent risk.
My questions is the following: Let’s assume a prospective buyer of the preferreds was aware of the risk that a conservator (or receiver) could be appointed under certain conditions that may or would negatively impact their interest, BUT a ruling by Scotus (in Collins on the APA) essentially broadened/re-defined/expanded (not sure the right word there) THIS conservator's powers beyond any previously appointed conservator in U.S. history, how was one to have contemplated that prior to purchase of the securities? In what context or litigation would that kind of 'argument' apply with the GSEs, if at all? I may likely be way off base, but it has been something I've been thinking about post the Scotus Collins ruling. I feel as if a prospective investor was being asked to understand the "definition" of the powers and latitudes of a conservator, but they have now changed/expanded the definition after the fact. Thank you, Jack
you should read Lamberth's opinion in denying the MTD, which I linked in the first of the trilogy of posts. lamberth is clear that the GSE investor's expectations should be somewhat more guarded than a normal corporation's investor expectations, and more so once entering into conservatorship. but he goes on to say that if the facts show that the GSEs were entering into their golden age of profitability at the time of the NWS, then it would be reasonable to think the govt would not "double down" with a measure like the NWS.
Thanks for all your insightful analysis. What do you think the remedy would likely be if the shareholders win this case? Would it be paid to the companies or to the shareholders directly? Would it be equal to (or based on) how much the government has been overpaid as a result of the Third Amendment relative to the original deal with a 10/12% dividend rate? Would there likely be a discount/haircut to that? Or would it be based on something else?
the complaint seeks expectancy damages, which would be such as to put plaintiff shareholders where they would be if the GSEs complied with covenant. so I would not expect any dividends as damages because I dont believe plaintiffs can prove that it would be reasonable for them to expect dividends to be paid rather than omitted. but par of junior preferred should be available...now how effectuated? simplest way is to nuke the senior preferred, which gets all of the junior preferred to par.
I see. Would the damages be paid directly to the shareholders?
in theory yes, but I fully expect that if plaintiffs win, the parties will agree to a result that traces through where the companies would be without the NWS...and this would be easiest to effectuate by killing senior preferred and having treasury give a credit of the overage in sweep dividends treasury received compared to what it would have received with no NWS...it is in all parties interest to eliminate senior pref to do the "re-IPO" and this would be a prelude to that
That makes sense. The remedy should reflect the undoing of the economics of the Third Amendment, whatever form that may take. I just wonder if there is a way the shareholders win the case, but they end up not actually getting the benefit (or they don't get the full benefit). What are your thoughts on that? What else, if anything, is required in order for the shareholders to actually succeed (e.g., for the junior preferreds to trade at approx. 100% of par value)?
judge could always determine that plaintiffs expectancy going into conservatorship was much lower than par (because all hell was breaking loose, or some such), so plaintiffs could win on merits but "lose" on damages
ROLG - thanks for that explanation regarding the reasoning behind the existence of the implied covenant. I admittedly have read many contracts over the years and don't believe I've received as good of an explanation!
I do have a question regarding the GSE litigation that I would appreciate your insight, if you are so inclined. I think I recall in some context earlier in the Lamberth related case a pleading or ruling that essentially spoke to, either implied or expressly stated, that a shareholder of the GSEs should have known or at least contemplated that ownership of the GSE shares was "different" (than say owning Apple) given the nature of the GSEs (that the charters provide or come along with a public policy or mission). I may be wrong, but I took that as saying 'you as an owner of the junior preferreds' need to recognize that this publicly traded security (that has a special charter to carry out a public mission) may incur certain conditions that require or warrant appointment of a conservator or receiver which represents additional inherent risk.
My questions is the following: Let’s assume a prospective buyer of the preferreds was aware of the risk that a conservator (or receiver) could be appointed under certain conditions that may or would negatively impact their interest, BUT a ruling by Scotus (in Collins on the APA) essentially broadened/re-defined/expanded (not sure the right word there) THIS conservator's powers beyond any previously appointed conservator in U.S. history, how was one to have contemplated that prior to purchase of the securities? In what context or litigation would that kind of 'argument' apply with the GSEs, if at all? I may likely be way off base, but it has been something I've been thinking about post the Scotus Collins ruling. I feel as if a prospective investor was being asked to understand the "definition" of the powers and latitudes of a conservator, but they have now changed/expanded the definition after the fact. Thank you, Jack
you should read Lamberth's opinion in denying the MTD, which I linked in the first of the trilogy of posts. lamberth is clear that the GSE investor's expectations should be somewhat more guarded than a normal corporation's investor expectations, and more so once entering into conservatorship. but he goes on to say that if the facts show that the GSEs were entering into their golden age of profitability at the time of the NWS, then it would be reasonable to think the govt would not "double down" with a measure like the NWS.