"If you can look into the seeds of time and say which grain will grow and which will not, speak then to me..." (William Shakespeare, Macbeth, Act I, Scene 3)
Investors of all stripes no doubt relate to that sentiment. Knowing what the future holds in store for a particular stock would certainly make the investor's decision much easier to make. Such knowledge, however, is not to be had . . . at least not lawfully . . . and the last few days have provided examples of both lawful and unlawful varieties of market intelligence.
On Thursday of last week, a federal jury in Manhattan convicted Mathew Martoma of conspiracy and criminal securities fraud in the latest insider-trading conviction of former employees of SAC Capital. Martoma was found guilty of trading in shares of Elan (ELN) and Wyeth (WYE) based upon non-public information regarding disappointing results from clinical trials of an experimental drug treatment for Alzheimer's Disease. In a written statement released after the verdict, US Attorney Preet Bharara of the Southern District of New York, said: "In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty." Martoma's conviction is the 79th insider trading conviction in the Southern District over the last four years.
Contrast this illegal activity, with a report in the February 11 edition of the Wall Street Journal on investor confidence in the eventual triumph of holders of preferred shares of Fannie Mae and Freddie Mac. The value of certain classes of preferred shares in the two mortgage entities have doubled over the previous six months as investors appear to be encouraged by the prospects of success in the more than 20 lawsuits brought on behalf of shareholders against the federal government's confiscation of the GSE's earnings.
Also encouraging is the fact that the taxpayer is also poised to fully recoup the government's investment in Fannie and Freddie. The fact that the mortgage entities have been a cash-cow for the government is one of the primary reasons that Marsha Courchane, an economist with Charles River Associates, cited in predicting that legislative efforts to abolish the GSE's would go nowhere for the foreseeable future. Speaking on February 7 to bankers and bank attorneys attending the annual banking law seminar sponsored by the University of Alabama School of Law, Dr. Courchane mentioned the Corker-Warner proposal, floated in the Senate by Senators Mark Warner (D-VA) and Bob Corker (R-TN), as a GSE "reform" scheme unlikely to be enacted.
These examples illustrate that the rule of law is an indispensable requirement for any rational, efficient and transparent financial market. Enforcing the rule of law is therefore one of the most important functions that the government can perform. But what happens when the government itself departs from adherence to the rule of law? The plaintiffs in the GSE lawsuits are claiming that they have been damaged by exactly that sort of departure from the rule of law by the Treasury and FHFA, Fannie and Freddie's principal regulator.
What do you think the future holds for Fannie and Freddie? Will the GSE's be reformed, recapitalized and relieved of government conservatorship? Will investors lose out while the government grabs the cash? Let us know what you think, The Banking Law Connection will keep a close eye on this evolving story.
UPDATE:
On February 4, 2014, the Ralph Nader project, Shareholder Respect, held a roundtable discussion on the impacts of the conservatorship of government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac and the future of Fannie Mae and Freddie Mac. Read a portion of the transcript here.
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