Tag Archives: Supreme Court

Reiss on Hedge Funds’ GSE Strategy

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American Banker quoted me in Everything Lenders Need to Know About GSE Shareholders’ Lawsuits (behind a paywall, but available in full here). It reads in part,

A powerful group of shareholders is amplifying attacks on housing finance reform legislation as they await resolution of a major legal battle, attempting to slow momentum on the bill before it likely passes the Senate Banking Committee.

Several big hedge funds that stand to possibly win billions of dollars for their shares in Fannie Mae and Freddie Mac are leading the charge, both in federal court and in the court of public opinion.

New investors’ rights groups said to be backed by the funds have popped up in recent weeks attacking legislation by Sens. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Mike Crapo, the panel’s top Republican.

Their presence is yet another complicating factor in the tumult ahead of a scheduled April 29 vote by the committee, potentially hurting efforts to secure additional support for the measure.

“Now that different people have come out with their bills, it’s been laid bare that the people working on [government-sponsored enterprise] reform aren’t going to do major favors for the shareholders,” said Jeb Mason, a managing director at Cypress Group. “As a result, the shareholders have adjusted their strategy to muddy the waters – and, if they can, kill the Johnson-Crapo bill.”

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As part of their effort, investors have begun taking their concerns public through new tax-exempt groups in Washington. The investors argue they were on the receiving end of a rotten deal from the government, particularly those that bought the stocks before the enterprises were put into conservatorship.

“The hedge funds have this incredibly sophisticated, multi-pronged strategy – lawsuits, legislation, academics on the payroll, funding anonymous PR campaigns, offering to buy the companies. They’re coming at it from all angles,” said David Reiss, a professor at Brooklyn Law School.

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Given the size and complexity of the cases, it’s likely to take years before the matter is resolved entirely. Analysts have suggested that if both sides continue to push the issue, it could even rise up to the Supreme Court over the next several years.

“You’re talking about many-year or potentially, decades-long lawsuits,” said Reiss. “The stakes are humongous and the parties are incredibly sophisticated and well financed. The government parties’ incentives to settle are not the same as a private party – I could imagine them seeing this all the way through.”

Reiss on BoA-FHFA Settlement

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Inside The GSEs quoted me in BofA MBS Lawsuit Settlement Shrinks List of FHFA Defendants (behind a paywall). It reads,

It’s only a matter of time before the remaining big bank defendants settle lawsuits filed by the Federal Housing Finance Agency over billions in non-agency mortgage-backed securities sold to Fannie Mae and Freddie Mac in the years leading up to the housing crisis, predicts a legal expert.

Last week, Bank of America agreed to a $9.3 billion settlement that covers its own dealings as well as those of Countrywide Financial and Merrill Lynch, which it acquired in 2008. The agreement covers some $57 billion of MBS issued or underwritten by these firms.

BofA did not admit liability or wrongdoing but it will pay $5.8 billion in cash to Fannie and Freddie and repurchase about $3.5 billion in residential MBS at market value. In return, FHFA’s lawsuits against the bank will be dismissed with prejudice.

The FHFA said it is working to resolve the remaining lawsuits regarding non-agency MBS purchased by the GSEs between 2005 and 2007. The suits involve alleged violations of federal and state securities laws and allegations of common law fraud. One week earlier, the Finance Agency announced that Credit Suisse Group had agreed to pay $885 million to settle a similar lawsuit.

Under the terms of that agreement, Credit Suisse will pay approximately $234 million to Fannie and approximately $651 million to Freddie. In exchange, certain claims against Credit Suisse related to the securities involved will be released.

So far, the FHFA’s lawsuits have recovered $19.5 billion in total payments. Expect more where that came from, said David Reiss, a professor at Brooklyn Law School.

“Every case is different and each institution has a different risk profile in terms of litigation strategy,” said Reiss. “The BofA settlement is so high profile because it’s Countrywide. It gives a lodestar when trying to figure out how low [defendants] can go in a settlement offer.”

Prior to the BofA deal, the FHFA had collected $8.9 billion in prior settlements. The Morgan Stanley settlement is the fourth largest of those settlements, behind Deutsche Bank, which agreed to pay $1.93 billion in December, and JPMorgan Chase, which reached a $4 billion settlement in October.

The bank defendants have repeatedly tried and failed to dismiss the FHFA suits on procedural grounds, including a claim that the cases were no longer timely.

In October, the U.S. Supreme Court declined to hear an appeal from the banks, prompting the expectation in legal circles that few, if any, of the remaining cases will ever go to trial.

“I don’t think that if you are a [big bank] defendant, that you see a particularly favorable judiciary,” said Reiss. “You see that the government is able to reach deals with companies in front of you and I think you’re thinking about settling.”

Entities that have yet to settle non-agency MBS claims with the FHFA include Barclays Bank, First Horizon National Corp., Goldman Sachs, HSBC, Nomura Holding America and the Royal Bank of Scotland.