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“If Sandra remains the FHFA Conservator for the next 5 years, Fannie Mae and Freddie Mac will get more deeply involved with funding initiatives at the expense of the GSES balance sheets to fund benefits for their targeted political voter base.”
Politics aside, the FnF book of business does reflect risk booked directly via FHFA goals , though FnF can price for it, too. An example of FHFA involvement is the goals in the 2022-24 Duty to Serve program for manufactured homes and rural low income housing. That’s just one example. And the more risk FnF book, the more there will be upward pressure on their LLPAs. Imagine if one enterprise reports for Q4 2023 that it booked more risk than was modeled earlier in ‘23 for the new FHFA-designed matrixes (the ones that garnered so much public criticism); in that case a LLPA price hike would be more likely to happen sooner rather than later. How much and where? My guess: in the affordable housing/LMI buckets, but how much is anyone’s guess. But even 1 basis point matters.
Robert,
I do think we should get a feel for the majority leanings on 1/17, the Loper oral argument date, though I wouldn’t expect a decision for at least 3 months thereafter.
FWIW, SCOTUS has refused to cite to Chevron v NRDC in its statutory review opinions for 6 years. Chevron is a dead doctrine walking. It’s just a question of when.
You asked “how is it legal to do a distribution by companies in conservatorship?”
Kthomp has explained this before. And I think this explanation is correct.
Although HERA restricts distribution of capital during conservatorship, that restriction is dependent on capital classifications. But shortly after the conservatorship was announced, the Director suspended capital classifications. And the suspension remains in place.
https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac/Pages/Capital-Requirements.aspx
This is news, but somewhat dated. On October 10 SCOTUS agreed to hear oral argument in January 2024 for Relentless v. Department of Commerce. This second Chevron case follows SCOTUS’ May announcement that it would hear Loper Bright Enterprises v. Raimondo. The two cases are factually identical. Both will evidently be heard in January 2024. The reason SCOTUS appears to be fast-tracking Relentless is that Justice Jackson is recusing herself from Loper Bright Enterprises. This will allow the full court to consider the Chevron question.
“Did you see Kthomp's reply regarding whether or not the authority of the Conservator to "preserve and conserve" applies only to assets rather than equity?”
Yes. And I think Kthomp is correct.
“Is there a challenge regarding the equity v assets angle?”
I doubt it.
The verbiage in 12 USC 4617 (b)(2)(B) authorizes the FHFA as conservator to “preserve and conserve the assets and property of the regulated entity”.
I doubt that shareholder equity can be considered an asset (accounting 101).
The statutory meaning and purpose of “property” is less obvious to me; but perhaps it means subsidiaries? In any case, I cannot think of a path for equity to be within either statutory term. My two cents.
FOFreddie, I am answering your prior question #3 here (before #2 …which I am
Still examining).
“3. Doesn"t this part of the Collins Opinion directly conflict with the District Court Opinion in Bhatti regarding the scope of 4617(f)?”
For clarity the two cases discussed here are
(1) the Fifth Circuit appellate panel case in Collins v Yellen on 10/12/23, and
(2) the US District Court case in Minnesota cited as Bhatti v. FHFA, 646 F. Supp. 3d 1003, 1010–11 (D. Minn. 2022).
Both cases were decided after Collins v Yellen 2021 at SCOTUS.
The Fifth Circuit appellate panel court in Collins on 10/12/23 did weigh in explicitly on the scope of 4617(f). But It’s important to note that they did so after accepting the constitutional claims as-is (note: the two courts’ conflict truly lies here), and also because 4617(f) was a point of contention between the parties. That is, the USG had raised 4617(f) as a defense to all claims, and the shareholder plaintiffs had rebutted. The Collins panel then at this point was obliged to evaluate 4617(f). The evaluation invoked USSC precedent, some nicely analogous Fifth Circuit precedent, and reading Collins v Yellen 2021 (SCOTUS) in context; all that considered, the court held (to the surprise of few I think) that 4617(f) does not bar the court house doors to constitutional claims.
In contrast, the Bhatti District court over in the Eighth Circuit (in MN) never actually reached the question of whether 4617(f) bars constitutional claims, because the Court opined first that Removal claims can only be pursued as APA claims. In this rather novel claim scenario (it would be a true case of first impression) there is nothing unlawful about the powers exercised, thus 4617(f) could surely bar those APA claims.
If you are also wondering whether Bhatti plaintiffs might ultimately have some success on an appeal (because of the Bhatti’s court unusual reliance on Thomas’ concurrence from SCOTUS) I would say I humbly doubt it. Why? Because the MN US district court took pains to stake out alternative reasons for dismissal: (1) failure to state a claim, and alternatively (2) failure to show harm — thus not surviving a motion to dismiss. The latter aligns with the basis for dismissal in Collins on appeal 10/12/23: both courts opined that the claims were simply too speculative. So any appeal that would find a Bhatti error (in the recasting of the Removal claims as APA claims) would IMO likely be harmless non-reversible error.
To wit, here is part of the Bhatti alternative rationale verbiage:
“Even if the type of claim that Collins seems to contemplate is properly considered a constitutional claim, plaintiffs have failed to state such a claim. . .Finally, the Court notes that, even if plaintiffs had stated the type of claim contemplated in Collins, the nature of their claim is far too speculative to survive a motion to dismiss.”
This is very similar to the closing remarks chosen by the Fifth Circuit panel in the Collins Removal claim (Section IV):
“ That level of uncertainty and speculation cannot survive a motion to dismiss, so the dismissal of plaintiffs' removal claims was proper.”
That’s pretty much it for your question - I hope I covered it.
Hi FOFreddie
Thanks for your thoughts. I am going to answer the 3 questions in 3 separate posts as best as I can get to them.
“1. Can common shareholders bring a Constitutional takings suit against the FHFA if the cramdown is implemented since it would be arguably outside the Conservator's power to "preserve and conserve"?”
I think you’ve proposed not a takings claim but rather an illegal exaction claim, but let me take them both separately and in that order.
(1) All takings claims current and future are presently neutered by the holding 2/22/22 in Fairholme Funds v US. So let’s say cramdown is announced today 10/31/23: if you file a Takings claim in the Court of Federal Claims tomorrow it will eventually be dismissed for failure to state a claim under rule 12(b)6, just as the Takings claim was in Fairholme Funds.
One caveat: Fisher/Shipmon/Reid are appealing to the CAFC to overrule Fairholme Funds based on SCOTUS’ 2023 decision in Tyler v Hennepin County. So Fisher’s is the one to watch for any remaining life in takings. But IMO it’s on life support and looking like it will take a Hail Mary to survive.
(2) If you style your claim not as a Takings but instead as an illegal exaction (as Barrett did in Fairholme Funds), I think there are two linked, pivotal questions: whether “preserve and conserve” is in fact a statutory duty, but, even if so, whether Collins has carved out an exception.
I recall courts have opined differently on the duty aspect. So let’s just assume that it IS a duty. Even so, doesn’t Collins allow the Incidental Powers of the Agency “and by extension the public it serves” to act as an exception to that duty? One might read the outcome of Barrett’s shareholder NWS illegal exaction that exact way: on pages 46-48 of Fairholme, the CAFC cites to Collins to defeat the exaction because of the public interest. Ostensibly, the USA will predetermine some rational public interest in which to clothe a cram down, thus shielding it by Collins. GLTA.
SCOTUS didn’t say that in a court opinion.
Rather, it was phrased as a question asked during the Collins v Yellen oral argument, and it was a single question, asked by a single justice who has now since retired (Breyer). SCOTUS then decided Collins v Yellen (“our last case” as you put it) in 2021.
The CAFC decided Fairholme Funds 2/22/22, and SCOTUS *declined Writ of Cert for the Fairholme Funds Takings claim*. No cognizable property, thus nothing taken.
There is a mistake, but not mine: one must understand that Shareholders are bound by the court opinion, not mine or yours.
I’ve been wondering the same. Miss him.
“its called a Takings”
Your assertion assumes that shareholders actually held (and/or hold) property.
But shareholders have held no cognizable property since the passage of HERA in 2008, thus shareholders can not sustain a valid takings claim. See page 68, and remember that after losing their takings case on 2/22/22, shareholder plaintiffs (Fairholme Funds, et al.) appealed to SCOTUS under a Writ of Certiorari —and SCOTUS *declined to hear their case*.
https://cafc.uscourts.gov/opinions-orders/20-1912.OPINION.2-22-2022_1911455.pdf
Note that subsequent to this case, Brydon Fisher’s property takings case was dismissed based squarely on Fairholme Funds; he is now appealing that dismissal. His case is to my knowledge the last and only remaining shareholder Takings case.
“JPS is not a contract”
Wrong. Provisions in JPS agreements are widely recognized under contract law.
“The interpretation of the special contractual preferences of preferred stock is primarily governed by the principles of contract law . . .
If a preferred stockholder asserts a claim related to a contractual right, power, or preference of the preferred stock, Delaware courts will interpret such rights, powers, and preferences as contractual rather than fiduciary in nature.“
https://www.americanbar.org/groups/business_law/resources/business-law-today/2014-january/words-that-matter-considerations-in-drafting/
Robert
In June 2021 in response to the Cedar Point Nursery v Hassid decision, Professor Richard Epstein commented that a rent-control challenge was now inevitable.
https://www.hoover.org/research/bombshell-decision-property-takings
Kthomp19 - thanks for your continued posting. It just needed to be said.
Right. For an en banc hearing or reconsideration Fisher would need a majority of active USCAFC judges to concur in the poll (though judges who are recused or disqualified do not count).
The rule is on pg 28 of 45:
https://cafc.uscourts.gov/wp-content/uploads/RulesProceduresAndForms/InternalOperatingProcedures/InternalOperatingProcedures.pdf#page28
“maybe 3 Judge Panel on Appeal and then ask for En Banc in latest Fisher case”.
Agree. That’s my thinking for Fisher. He will appeal first to a panel at the United States Court of Appeals for the Federal Circuit. After that panel decision, he will appeal en banc.
Can you please copy/paste the text or provide a direct hyperlink?
The iHUB image says it is “suppressed”
and won’t open for me on my operating system.
Well, I agree with TMWNN. So that’s one.
Robert I agree: unless the stock agreement between the corporation and its buyers has a fee-shifting provision, the American rule applies and each party simply pays its own legal fees.
I agree with FFFacts. 60.
FWIW (nothing, I know…) I think attorney Robert Schubert’s brief for derivative plaintiffs Fisher, Reid, and Shipmon is spot-on correct that Fairholme has been abrogated by Tyler. Good luck to these 3 plaintiffs.
Answer: I don’t know because I cannot understand most of what is being said.
Agree maybe not the best idea but when has that stopped USG so far?
You are correct that interest would accrue post-judgment. Delaware law* supports that the right to post-judgment interest attaches upon the entry of a judgment.
Good one
I think allowing for an eventual orderly exit is a sensible reason to pay the litigation claims; but I also think it is a question of the timing. The Director can delay such payment until the exit is more firmly in view. Not stalling, just sensibly cautious.
Treasury was able to “take distributions” only because the law authorized the Director to first make them. See the four specific reasons listed in 12 CFR 1237.12(b)1 through 12(b)4.
https://www.ecfr.gov/current/title-12/chapter-XII/subchapter-B/part-1237
Read on to 12 CFR 1237.13 to see the restriction on paying Securities Litigation Claims (“The Agency, as conservator, will not pay …”).
IMHO, Wise Man is right —but not for any of the reasons he thinks. It’s actually much simpler.
(1) In 2011 FHFA published its final rule & regulation (R&R) that specified that for purposes of the HERA section quoted by Rodney5, *any* payout to a shareholder is considered a “distribution”. Thus a judgment payout or a settlement payout are all precluded — until the capital-related conditions specified in the R&R are met.
It was clear that the ostensible intent of the R&R in 2011 was to prevent huge litigation damages (a prescient & timely concern given the status of various cases 12 years ago) from impacting the assets of the enterprises. Twelve years later, the R&R is unchanged, and I have not heard any intelligible contrary argument. [I’ll also see if I can dig up the law firm blog post I read on this subject. Give me a few days.]. Payment will be mandatorily deferred until the R&R terms are satisfied.
(2) If the USG refuses to pay a court-ordered judgment, there is no auto-enforcing mechanism to compel any differently. Just as for any defendant who refuses to pay a judgment, Ps would have to initiate some manner of civil action to thwart the refusal (e.g., Ps might file a declaratory action regarding the R&R). But the USG will defend itself, and USG will argue the enterprise assets are covered under either a federal statutory exemption and/or are statutorily protected assets. And the odds are the USG will be right on at least one of those.
All IMHO—just another day for a bored board lawyer.
“Hallelujah. Nobody wins” —Brian Fallon
That is my feeling as well
Robert
I think the 25:1 risk-to-capital ratio —or said differently a 4% capital requirement—may have come from the private mortgage insurance (which is monoline) world.
The 25:1 ratio is the most common standard used by state regulators on monoline mortgage insurance companies. For example, MGIC is regulated to that standard by the Wisconsin OCI, and Radian is regulated to it in Pennsylvania.
Robert thanks for your reporting.
He didn’t and still doesn’t. Over 80 years of recognition by courts must not be enough.
Right the MQD was not litigated in Collins.
I have not read the Amicus brief you mention. I need to read that, and a lot more including the DOJ brief and then I may have some worthwhile thought.
Well if all that were true (#1, 2, and 3) you may have a colorable claim for 7/13/17 to 9/30/19 (the date of the announcement).
There are a lot of assumptions there. Also
You didn’t say what the major question was, but I’m guessing it’s ‘whether the enterprises should remain stockholder owned and in their current form?’
Law professors Davidoff and Zaring may have some answers for you, as far as the source of Treasury authority. Their law review article is linked at the end of this post.
First, you might be interested that the two commentators state that the US government found some legal legitimacy by acting as a “vigorous deal maker”, relying not on regulatory authority but on contract law principles of arms-length transactions. [pages 466-467].
Second, more specifically to authority for the SPSA commitments, see pages 484-490. The two scholars state on pg 487:
“HERA…provided the Treasury Secretary with…broad…authority to recapitalize the GSEs. Section 1117 of HERA stated, “the Secretary of the Treasury is authorized to purchase any obligations and other securities issued by the corporation . . . on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine.”
…
“In order to increase each GSE’s capital, Treasury also entered into senior preferred share purchase agreements with Fannie Mae and Freddie Mac for each to issue up to $100 billion of senior preferred stock to the Treasury Department.”
[see also Footnotes 97-100, pg 487]
As an aside, the authors several times mistakenly refer to FHFA as “FHA”. Other than that minor error, it’s a thoughtful law review, at times quite critical of the US.
http://www.administrativelawreview.org/wp-content/uploads/2014/04/Regulation-by-Deal-The-Governments-Response-to-the-Financial-Crisis.pdf
Correct. Orals will be sometime in or after October 2023, with decisions by June 2024 at the latest.
Loper (Chevron case):
https://www.theregreview.org/2023/06/22/walsh-supreme-court-to-hear-case-endangering-the-chevron-doctrine/
CFSA v CFPB:
https://www.ballardspahr.com/insights/blogs/2023/05/podcast-cfsa-v-cfpb-moves-to-us-supreme-court-guest-giancarlo-canaparo
I noticed the same comment about appropriations. This is a quote from SCOTUSBlog (emphasis *** is mine):
Nebraska Attorney General Mike Hilgers, one of the state officials who brought the challenge to the program, praised the decision. In a statement, Hilgers said that Friday’s decision “is a timely reminder that the President is no king” but must instead “work with, and not around, Congress.” “Our elected federal representatives are closest to the people, ***have the power of the purse***, and are entrusted with the responsibility of tackling difficult policy issues.”
Since FHFA gets its funding from F/F, I think I would say those fungible dollars mean that both enterprises are footing the bill for FHFA.
Your idea sounds valid: as a stockholder you could argue the past X number of years of cash sweeps are invalid and harmed F/F. Here, X equals the statute of limitations period in the applicable jurisdiction.
“In theory could any of the 8,000+ Fannie Mae and Freddie Mac shareholders initiate a lawsuit in their local federal district courthouse arguing that the August 17, 2012 Net Worth Swipe was unconstitutional and therefore void?”
No I don’t think so. The statute of limitations has passed; 6 years is the max and it’s in the COFC. So new NWS claims at this point would be time barred. The period began to run 8/17/12, expiring 8/17/18.
Daisey’s premise seems to be: if all FHFA action are invalid, so must be all F/F actions. That seems a bit of a leap.
In any event can you tell from the documentation whether there was an attorney — or was this just filed pro se? Hmm.
As I understand CFPB v CFSA’s ruling in the Fifth Circuit, Congress ceded too much power to the Executive by forever yielding its power of the purse over FHFAs budget.
This premise is true whether Congress is split or whether it is controlled by a single party, because Congress simply has no say, either way.
Any idea of SCOTUS ETA on CFPB v CFSA?