First, we going to venture and predict “not if but rather when” we hear the magic word from Judge Sweeney as she rules on the Motion to Dismiss with a commanding, “DENIED”. It might take between 7 to 18 more months with a mode average of 9 months before we hear the magic word. (not a very scientific sampling, mainly guesses among friends but confident of the results)
It appears that memorandums, reports, documents, hearing testimonies and not to mention future depositions from discovery might bring more than enough compelling evidence to support the court’s ruling against the Motion to Dismiss and allow stayed cases to go forward. We feel comfortable about Plaintiffs securing more enlightening evidence. We hope to have the opportunity to examine more non-protected information sooner rather than later.
As you may recall, GSEs were adequately capitalized and representatives from Treasury, Federal Reserve, and FHFA repeatedly stated this truth in the months and weeks leading to the government’s imposition of the conservatorship. In fact, testifying before Congress, both Henry Paulson, then-Treasury Secretary, and Ben Bernanke, then-Chairman of the Federal Reserve conveyed that the GSEs were adequately capitalized, holding capital well in excess of regulatory requirements and had large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets. Also, it has been clearly documented in letters to each GSE dated August 22, 2008, FHFA found that each company met all relevant capital requirements, including additional capital requirements imposed by FHFA above the statutory minimums and the requirements arising from FHFA’s risk-based stress test. In short, both GSEs were clearly sounded and solvent without a need for a “bailout” at the time when FHFA placed them in conservatorship.
In case you may have forgotten, MAKE NO MISTAKE, according to the CRS Report to Congress dated September 15, 2008, last paragraph on page 3:
Treasury’s and FHFA’s intervention has been described as a “SEIZURE,” “TAKEOVER,” “rescue,” and “bail-out” of the GSEs. The first two terms are accurate — the FHFA as conservator has taken full control over the operations of the companies. “Bail-out” and “rescue” are more controversial terms. Common shareholders have lost their voting rights and nearly all their investment, and dividends on preferred and common shares have been suspended.
Next, lets examine PSPA’s hidden purpose. The PSPA allowed Treasury to improperly appropriated and extracted GSEs assets and profits with clear intention of winding them down. Furthermore, the PSPA was created and consummated by two government agencies with clear conflict of interests and/or self-dealing in mind. Moreover, the PSPA restricted the powers and duties upon FHFA granted by 12 U.S. Code § 4617 (b) Powers and duties of the Agency as Conservator or receiver subsections.
It is crystal clear, the Government’s conduct constituted an illegal exaction and/or taking without just compensation in violation of the Fifth Amendment of the U.S. Constitution.
>Imposing the conservatorship upon GSEs causing the value to plummet; thus destroying shareholder rights and value;
>Imposing usurious terms in the PSPA on the GSEs while taking warrants for 79.9% of Common stock at a nominal exercise price; thereby, further diluting shareholder value resulting towards lower share price;
>Dissipating the assets of the GSEs under Conservatorship by forcing them to assume and guarantee large amounts of toxic debt, increase loan loss reserves, and write down significant value of their deferred tax assets; and
>Subsequently changing the terms of the PSPA through the Third Amendment to more fully ensure a “Net Worth Sweep” and take any remaining asset value away from shareholders of the GSEs.
One of the key actions taken by the government was the complete removal and replacement of the Board of Directors majority and Senior Executives including by not limited to CEOs and CFOs of the companies which might be construed as the physical taking and/or an illegal exaction point similar to the AIG argument. The ruling in the AIG should provide a glimpse of future expectation going forward.
In conclusion, it is undeniable that the government disregarded the rights and interests of GSEs shareholders in taking control of the companies, saddling them with the oppressive PSPA and dissipating their assets to achieve its public policy objectives while not providing just compensation and making it virtually impossible for the companies to regain their capital to meet their sound and solvent conditions along with preserve and conserve the assets and property, and to restore the GSEs status as private corporations.
Therefore, it’s only a matter of time when we finally hear that the Motion to Dismiss is DENIED and the big horse race begin among many filed complaints against the government as they race towards their final ruling.