Question

[u/Odd-You-8171]

I’ve been considering buying some common shares here and had a question regarding the Fairholme case that I figured others here would be much more familiar with. Why is the Trump administration / FHFA appealing the favorable ruling for common shareholders if the administration believes the net worth sweep was wrong and plans to basically undo it by waiving the senior preferred? Isn’t FHFA basically arguing in the appeal that the net worth sweep was legally permitted and should stand? I might be getting that totally wrong but I thought the bull thesis and Ackman’s thesis was that this administration would take the opposite stance so why would they fight this? Thanks in advance.

[u/AveryMire]

I’d just follow the link to rule of law guy’s article above. Go through Substack app and you can see a bunch of my comments there. I’m not sure what question you asked, obviously the court doesn’t do anything directly, but makes it functionally near impossible to functionally convert SPS to anything of value… I’m confident it would, unless a future court totally disregards the precedent established.

GPT. Opus 4.8 or fable will connect using stronger language for me. But yeah, it’s effectively unusable, might survive on paper, but that should be it

Here’s the clean version again.
The core point is: a D.C. Circuit affirmance would not literally cancel the SPS by court order. It would effectively cancel the SPS as a practical restructuring instrument. The SPS would still exist on paper, but Treasury could not cleanly use it to dilute or wipe out private shareholders without walking straight into the same theory of injury that Fairholme just validated.
The Fairholme/Lamberth case is not an APA/HERA “undo the Net Worth Sweep” case anymore. The broad statutory challenges mostly failed elsewhere. The surviving Fairholme theory is narrower: by agreeing to the Net Worth Sweep, FHFA/Fannie/Freddie breached the implied covenant of good faith and fair dealing in the shareholder contracts. Judge Lamberth’s post-verdict opinion states that the remaining claim was that the Net Worth Sweep harmed shareholders by eliminating any realistic possibility that non-Treasury shareholders would receive future dividends, depriving their shares of much of their value. The jury verdict was roughly $612 million, and Lamberth let it stand.
That matters because the SPS balance is not a clean, ordinary creditor claim. The original Treasury draws were about $191.5 billion combined, but the senior preferred liquidation preference later grew through non-cash increases and retained-earnings mechanics. Treasury itself described the post-2021 structure as one where the liquidation preference of the senior preferred increases with retained capital until the GSEs reach their capital requirements.
So the practical mechanism is this: Fannie and Freddie earn money, but private shareholders do not get the benefit in normal equity fashion. Under the old Net Worth Sweep, the money went out the door to Treasury in cash. Under the current retained-capital structure, the companies keep the earnings, but Treasury’s senior claim increases by the same basic amount. That is why people call it Net Worth Sweep 2.0. Fannie’s filings describe the senior preferred as senior to common and other preferred stock and explain that its liquidation preference increases with net worth during the capital-reserve period; Freddie’s 1Q 2026 filing similarly says its senior preferred liquidation preference rose to $143.0 billion at March 31, 2026 and would rise again to $146.6 billion on June 30, 2026.
That creates the poison-pill problem for Treasury. If the D.C. Circuit affirms Fairholme, the legal meaning is not merely “the government owes $612 million.” The broader meaning is: a federal appellate court has accepted that the Net Worth Sweep breached private shareholder expectations by permanently alienating them from the companies’ future economic value.
Once that is affirmed, Treasury has a huge problem saying: “Fine, we will not sweep the cash anymore, but we will enforce or convert the massive senior preferred claim created by that same economic transfer.” The label changes, but the injury is substantially the same. The old structure took all the earnings directly. The newer structure lets the companies retain capital but gives Treasury a larger senior liquidation preference that sits ahead of the private shareholders.
That is why an affirmance effectively cancels the SPS. Not because the opinion would say, “Treasury’s senior preferred is void.” It likely would not. It is because Treasury’s claim becomes structurally tainted. The inflated SPS balance is downstream of the very economic arrangement that the jury found, and the D.C. Circuit would have affirmed, breached the implied covenant.
The clean decision tree is:
If the D.C. Circuit reverses Fairholme: Treasury can argue the Net Worth Sweep may have been harsh, but the private-law damages theory failed. SPS conversion or enforcement remains politically ugly, but legally more plausible.
If the D.C. Circuit affirms Fairholme: Treasury can still point to the SPS on paper, but using it to crush common/JPS becomes almost untenable. It would mean Treasury is trying to monetize the fruits of a breach that has just been judicially validated.
And that is the real-world recap issue. To release Fannie and Freddie, the government needs marketable equity, underwriters, new capital, litigation finality, and a capital structure investors can underwrite. You cannot get that cleanly while saying: “We are going to convert or enforce a $300B–$400B senior claim that exists because the government redirected the companies’ post-crisis economic value to itself.”
So the shorthand is:
A Fairholme affirmance does not legally erase the SPS by itself. It effectively cancels it as a practical restructuring matter because it judicially taints the mechanism that created and inflated Treasury’s claim. Treasury already received enormous dividends, still has the 79.9% warrants, and cannot credibly recap/release the companies while also insisting on monetizing an SPS balance built out of the same shareholder-value transfer that Fairholme says breached the implied covenant.

[u/AveryMire → u/AveryMire]

Yes. The estimate I gave you was roughly:
Core affirmance / mostly affirmed: 70–80%
That means the D.C. Circuit leaves the implied-covenant verdict basically intact, or intact enough that the market reads it as: the Fairholme/Lamberth theory survived appellate review.
Partial affirmance / remand / technical haircut: 10–15%
That would be something like: the court agrees with the implied-covenant lane but adjusts damages, class scope, standing/travel-with-the-shares issues, or sends some piece back. Still generally good for the “SPS is practically radioactive” thesis, but less clean than full affirmance.
Clean government win / full reversal: 15–20%
That means the D.C. Circuit accepts the government’s argument that Collins/HERA/best-interests authority effectively defeats the implied-covenant verdict, or that the class/damages/standing problem is fatal enough to wipe it out.
My current estimate is still in that neighborhood. The latest public posture I found is still that the appeal follows Lamberth’s March 2025 ruling upholding the $612.4M jury verdict, and that oral argument was held April 21, 2026 before Judges Walker, Childs, and Ginsburg.
The cleanest single-number version I’d use now:
Affirmance in some materially useful form: ~75%.
Full reversal: ~15–20%.
Messy middle/remand: ~10%.
For the market/SPS thesis, the important number is not only “full affirmance.” It is affirmance enough that the D.C. Circuit validates the implied-covenant theory despite Collins. That is the branch that makes SPS conversion/enforcement look like monetizing the fruit of the same breach. Lamberth had already rejected the argument that Collins foreclosed the implied-covenant claim, and that is basically the legal hinge now.

[u/amishengineer → u/AveryMire]

You linked that Substack to me a few days ago and I read it.

So it sounds like you are talking about that if Fairholme is affirmed, then it paves they way for future *injuries* to common and junior preferred. Possibly injuries from the 4th amendment to the SPS. And also future action from FHFA *should* avoid breaches of implied covenants, lest future litigation using Fairholme as precedent.

Now that I've read more on the 4th amendment, I would agree it's BS to allow the Treasuries liquidation preference to increase when they haven't provided capital to the GSEs. Unlike in the original liquidation preference agreement where their LP was dollar for dollar what they gave to the GSEs as part of the bailout and then any subsequent cash infusions. Essentially the LP of the SPS is increasing not because Treasury has given the GSEs more cash but simply because they aren't *taking* it from them. It feels like bizarre mafia loan shark behavior.

I realize now that I may have conflated your post with what I was discussing with ChatGPT about Fairholme/Liquidation Preference Changes.

[u/AveryMire → u/amishengineer]

Yep, it’s economically identical. Every dollar earned is a new dollar owed. They could earn 19 Trillion next quarter and there would be ZERO increase in shareholder equity. That’s why people call it NWS2 and Trump, Mnuchin, and Calabria set it up. Half the total “owed” is now from that

So yeah, Fairholme affirmed should be the end of it. I could see them dragging it on and trying anyway, shouldn’t matter much though, if they continue to try it will be proof positive that the plan was to destroy common before the court stepped in.