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07/07/2015 CLERK'S ORDER filed [1561238] granting appellees' unopposed motion to extend time [1560877-2], The following revised briefing schedule will now apply: APPELLEES Brief(s) due on 09/14/2015. APPELLANTS Reply Brief(s) due 10/26/2015. DEFERRED APPENDIX due 11/09/2015. Final Briefs due 11/30/2015. [14-5243, 14-5254, 14-5260, 14-5262]
N42 is right...:)
Hope Sweeney fires back some questions to this one, "listening in."
The Government requests that a telephone line be made available for Katherine Brandes, counsel from the Department of the Treasury, to listen to the status conference.
status conference starts 1pm EDT!
Yes, lots of reading, no problem falling asleep at night!
Good point!
Especially on the OTC, but somebody made out well in the premarket today!
Somebody got a good deal! $$$NUGN
Macey amicus brief for Perry Capital appeal (just Table of Contents to give you and idea)
BRIEF OF JONATHAN R. MACEY AS AMICUS CURIAE IN SUPPORT OF APPELLANT AND REVERSAL ______________________
Jonathan R. Macey
Sam Harris Professor of Corporate Law,
Corporate Finance, and Securities Law Yale Law School
127 Wall Street
New Haven, Connecticut 06511 Telephone: (203) 432-7913
Eric Grant grant@hicks-thomas.com
Hicks Thomas LLP
8801 Folsom Boulevard, Suite 172 Sacramento, California 95826 Telephone: (916) 388-0833 Facsimile: (916) 691-3261
Counsel for Amicus Curiae Jonathan R. Macey
USCA Case #14-5243 Document #1561151 Filed: 07/06/2015 Page 2 of 26
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
Pursuant to Circuit Rule 28(a)(1), I hereby certify as follows:
(A) Parties and Amici. All parties, intervenors, and amici appearing be- fore the district court and in this Court are listed in the Initial Opening Brief for In- stitutional Plaintiffs (filed June 29, 2015) or in the Initial Opening Brief for Class Plaintiffs (filed June 30, 2015).
(B) Rulings Under Review. Accurate references to the rulings at issue ap- pear in the two aforementioned briefs.
(C) Related Cases. Accurate references to related cases appear in the two aforementioned briefs.
Dated: July 6, 2014.
s/ Eric Grant Eric Grant
Counsel for Amicus Curiae Jonathan R. Macey
?i
USCA Case #14-5243 Document #1561151 Filed: 07/06/2015 Page 3 of 26
CERTIFICATE REGARDING SEPARATE AMICUS BRIEF
Pursuant to Circuit Rule 29(d), I hereby certify that a separate brief for Ami- cus Curiae Jonathan R. Macey is necessary. As elaborated in the Interest of Amicus Curiae section below (p. 1), Amicus teaches corporate law, corporate finance, and securities regulation at one of the nation’s leading law schools. His extensive re- search and recognized expertise in these fields is especially valuable in discussing how the challenged governmental action has deprived Plaintiff shareholders of all economically beneficial uses of their property and otherwise interfered with their reasonable investment-backed expectations.
Dated: July 6, 2014.
s/ Eric Grant Eric Grant
Counsel for Amicus Curiae Jonathan R. Macey
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USCA Case #14-5243 Document #1561151 Filed: 07/06/2015 Page 4 of 26
TABLE OF CONTENTS
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES ..............i CERTIFICATE REGARDING SEPARATE AMICUS BRIEF .............................. ii TABLE OF AUTHORITIES .....................................................................................v GLOSSARY............................................................................................................ vii INTEREST OF AMICUS CURIAE ..........................................................................1 ARGUMENT .............................................................................................................1
I. Owning shares in a regulated entity does not deprive Plaintiff
shareholders of a cognizable property interest in the dividends or
liquidation preferences that shareholders expect to receive when
they purchase their shares................................................................................1
A. Plaintiff shareholders had no reason to expect the entirety
of the GSEs’ net profits to be seized.....................................................2
B. 12 U.S.C. § 4617(b)(2)(A)(i) does not grant the FHFA the
right to seize dividends, intended for shareholders, for itself ...............4
II. The Third Amendment’s net worth sweeps constitute regulatory takings..............................................................................................................5
A. The Third Amendment’s net worth sweeps constitute per se regulatory takings, as they deprive Plaintiff shareholders of
“all economically beneficial uses” of their property.............................5
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USCA Case #14-5243 Document #1561151 Filed: 07/06/2015 Page 5 of 26
Page
B. Alternatively, the Penn Central factors weighed in balance
and in an ad hoc fashion establish the Third Amendment’s
net worth sweeps as regulatory takings.................................................8
1. Regardless of the “character of the government’s
action” in relation to the Third Amendment, the other
two factors are sufficient to evidence a regulatory
taking ........................................................................................... 9
2. The economic effects of the Third Amendment’s net
worth sweeps are severe..............................................................9
a. The Third Amendment’s net worth sweeps
deprive Plaintiff shareholders of any and all
hope for dividends in the future........................................9
b. The Third Amendment’s net worth sweeps
drastically decrease the probability of capital
gains upon the sale of Plaintiff shareholders’
shares ..............................................................................10
3. The Third Amendment’s net worth sweeps interfered
with Plaintiff shareholders’ reasonable “investment-
backed expectations” ................................................................11
a. It is a violation of Plaintiff shareholders’ funda-
mental rights for a firm to deprive them of any
and all hope for dividends in the future..........................13
b. Purchasers of shares reasonably expect those
shares to retain their tradability and liquidity.................14
III. Under the District Court’s conception of a regulatory taking, no
share of stock could ever be subject to a regulatory taking...........................15
CONCLUSION ........................................................................................................15 CERTIFICATE OF COMPLIANCE
CERTIFICATE OF SERVICE
Pershing Square amicus brief for Perry Capital Appeal
ORAL ARGUMENT NOT YET SCHEDULED
Nos. 14-5243 (L), 14-5254 (con.), 14-5260 (con.), 14-5262 (con.)
United States Court of Appeals for the District of Columbia Circuit
PERRY CAPITAL LLC,
for and on behalf of investment funds for which it acts as investment manager,
Plaintiff-Appellant, v.
JACOB J. LEW,
in his official capacity as the Secretary of the Department of the Treasury, et al.,
Defendants-Appellees.
On Appeal From The U.S. District Court For The District Of Columbia
Case No. 1:13-cv-01025-RCL (Lamberth, J.)
Brief Of Louise Rafter, Josephine And Stephen Rattien, And Pershing Square Capital Management, L.P.
As Amici Curiae In Support Of Appellants And Reversal
Thomas F. Cullen Jr. Michael A. Carvin James E. Gauch Lawrence D. Rosenberg Paul V. Lettow
JONES DAY
51 Louisiana Avenue, N.W. Washington, DC 20001 Telephone: (202) 879-3939 jegauch@jonesday.com
Counsel for Amici Curiae
????????????
USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 2 of 40
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
A. Parties and Amici: Except for the following, all parties, intervenors, and amici appearing before the district court and in this Court are listed in the Initial Opening Brief for Institutional Plaintiffs and the Initial Opening Brief for Class Plaintiffs. This brief is submit- ted on behalf of the following Amici:
? Louise Rafter
? Josephine and Stephen Rattien
? Pershing Square Capital Management, L.P.
B. Rulings Under Review: Accurate references to the rulings at issue appear in the Initial Opening Brief for Institutional Plaintiffs and the Initial Opening Brief for Class Plaintiffs.
C. Related Cases: Accurate references to related cases appear in the Initial Opening Brief for Institutional Plaintiffs and the Initial Opening Brief for Class Plaintiffs.
CORPORATE DISCLOSURE STATEMENT
Amicus Pershing Square Capital Management, L.P. does not have a parent company, and there are no publicly held companies that own 10% or more of the stock of Pershing Square Capital Management, L.P.
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 3 of 40
TABLE OF CONTENTS
Certificate as to Parties, Rulings, and Related Cases .............................. i Corporate Disclosure Statement................................................................i Table of Contents.......................................................................................ii Table of Authorities..................................................................................iii Glossary .................................................................................................... vi Interest of Amici Curiae............................................................................1 Statutes ...................................................................................................... 1 Introduction ............................................................................................... 2 Argument ................................................................................................... 5
I. The Court Must Interpret HERA So As To Avoid Serious Constitutional Questions Under The Takings Clause. .................. 5
II. The Net Worth Sweeps Are Takings Without Compensation........ 9
A. Conservatorships Do Not Eliminate Shareholders’
Property Interest In Their Stock. ............................................... 9
B. The Net Worth Sweeps Constitute Takings Under Any
Mode Of Analysis. ...................................................................... 17
1. The Net Worth Sweeps Are Direct Government Appropriations Of Private Property..................................... 20
2. Even If The Net Worth Sweeps Are Assessed As
Regulatory Takings, Compensation Is Required................. 22
Conclusion ................................................................................................ 29 Certificate Regarding Separate Briefing................................................31 Certificate of Compliance ........................................................................ 32 Certificate of Service ............................................................................... 33
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 4 of 40
CASES
TABLE OF AUTHORITIES*
Bell Atl. Tel. Companies v. F.C.C.,
24 F.3d 1441 (D.C. Cir. 1994) ................................................................ 8
Brown v. Legal Found. of Wash.,
538 U.S. 216 (2003)..............................................................................19
*California Housing Securities, Inc. v. United States,
959 F.2d 955 (Fed. Cir. 1992) .................................................. 11, 12, 13
Chevron USA, Inc. v. N.R.D.C., Inc.,
467 U.S. 837 (1984)................................................................................7
Cienega Gardens v. United States,
331 F.3d 1319 (Fed. Cir. 2003) ............................................................ 25
Cnty. of Sonoma v. FHFA,
710 F.3d 987 (9th Cir. 2013)..................................................................5
*First Hartford Corp. Pension Plan & Trust
v. United States,
194 F.3d 1279 (Fed. Cir. 1999) ............................................................ 16
*Golden Pacific Bancorp v. United States,
15 F.3d 1066 (Fed. Cir. 1994) ............................................ 11, 12, 13, 21
*Horne v. Department of Agriculture,
No. 14-275, slip op. (U.S. June 22, 2015) ...................................... 18, 23
I.N.S. v. St. Cyr,
533 U.S. 289 (2001)................................................................................7
Koontz v. St. Johns River Water Mgmt. Dist.,
133 S. Ct. 2586 (2013)..........................................................................21
*Lingle v. Chevron USA Inc.,
544 U.S. 528 (2005) ...................................................... 17, 18, 20, 22, 29
Loretto v. Teleprompter Manhattan CATV Corp.,
458 U.S. 419 (1982)..............................................................................14
* Authorities upon which Amici chiefly rely are marked with asterisks.
Page(s)
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 5 of 40
TABLE OF AUTHORITIES (cont.)
Lost Tree Vill. Corp. v. United States,
No. 14-5093, __ F.3d __, 2015 WL 3448943
(Fed. Cir. June 1, 2015) ................................................................. 22, 23
Lynch v. United States,
292 U.S. 571 (1934)..............................................................................21
Nat’l Trust for Historic Pres. v. FDIC,
21 F.3d 469 (D.C. Cir. 1994)..................................................................5
Pa. Coal Co. v. Mahon,
260 U.S. 393 (1922)..............................................................................17
Palazzolo v. Rhode Island,
533 U.S. 606 (2001)..............................................................................23
Penn Central Transportation Co. v. City of New York,
438 U.S. 104 (1978)........................................................................13, 24
Phillips v. Wash. Legal Found.,
524 U.S. 156 (1998)........................................................................21, 24
Ruckelshaus v. Monsanto Co.,
467 U.S. 986 (1984)........................................................................25, 29
Solid Waste Agency of N. Cook Cnty.
v. U.S. Army Corps of Eng’rs,
531 U.S. 159 (2001)................................................................................2
Steel Co. v. Citizens for a Better Env’t,
523 U.S. 83 (1998)..................................................................................3
Tahoe-Sierra Pres. Council, Inc.
v. Tahoe Reg’l Planning Agency,
535 U.S. 302 (2002)........................................................................18, 28
United Nuclear Corp. v. United States,
912 F.2d 1432 (Fed. Cir. 1990) ............................................................ 25
United States v. Causby,
328 U.S. 256 (1946)..............................................................................19
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Page(s)
USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 6 of 40
TABLE OF AUTHORITIES (cont.)
United States v. Gen. Motors Corp.,
323 U.S. 373 (1945)..............................................................................19
United States v. Sec. Indus. Bank,
459 U.S. 70 (1982)..................................................................................9
*Waterview Mgmt. Co. v. FDIC,
105 F.3d 696 (D.C. Cir. 1997) ................................................ 2, 3, 7, 8, 9
Webb’s Fabulous Pharmacies, Inc. v. Beckwith,
449 U.S. 155 (1980)..................................................................19, 20, 21
STATUTES
12 U.S.C. § 4617(a) ................................................................................... 14 12 U.S.C. § 4617(b) ............................................................................... 6, 14 12 U.S.C. § 4617(c)...................................................................................... 6
OTHER AUTHORITIES
76 Fed. Reg. 35724, 35727 (June 20, 2011) ............................................. 15
Conservator, Black’s Law Dictionary (10th ed. 2014)...............................5
FHFA, Questions and Answers on Conservatorship
(Sept. 7, 2008)....................................................................................... 14
Letter from Edward J. DeMarco, Dir., FHFA, to Senate
(Nov.10,2011) ....................................................................................16
The Present Condition and Future Status of Fannie Mae and
Freddie Mac: Hearing Before the Subcomm. of Capital
Markets, Ins. & Gov’t Sponsored Enters of H. Comm. on
Fin. Servs., 111th Cong. 11 (2009) (statement of James B.
Lockhart, III)........................................................................................15
Sutherland’s Statutes and Statutory Construction § 47.02
(7th ed. 2014).......................................................................................... 5
Turmoil in U.S. Credit Markets: Hearing Before Senate
Committee on Banking, Housing, and Urban Affairs, 2008
WL 4325397 (2008) (statement of James B. Lockhart, III) ............... 15
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Page(s)
USCA Case #14-5243
Document #1561149 Filed: 07/06/2015 Page 7 of 40
??Amici
Louise Rafter, Josephine and Stephen Rattien, and Pershing Square Capital Management, L.P.
?Appellants
The Companies
Fannie Mae, or Fannie
FHFA
FIRREA
HERA
Inst.Pl.Br.
Net Worth Sweeps, or Sweeps
RTC
Treasury
GLOSSARY
The Institutional Plaintiffs (as defined in the Institutional Plaintiffs’ Glossary) and the Class Plaintiffs (as defined in the Class Plaintiffs’ Glossary)
Fannie Mae and Freddie Mac
Federal National Mortgage Association
Federal Housing Finance Agency
Financial Institutions Reform, Recovery, and Enforcement Act
The Housing and Economic Recovery Act of 2008, Pub. L. 110-289, 122 Stat. 2654 (2008)
The Institutional Plaintiffs’ Opening Brief
The acts by which Fannie Mae and Freddie Mac transfer their net worth to Treasury every quarter (less a capital reserve that declines until reaching zero in 2018), in accordance with the Third Amendment to the Senior Preferred Stock Purchase Agreements entered into between Treasury and FHFA on August 17, 2012
Resolution Trust Corporation
United States Department of the Treasury
????????Freddie Mac, or Freddie
Federal Home Loan Mortgage Corporation
??????Op.##
District Court’s Memorandum Opinion (Dkt. 1:13-cv-1025, ECF No. 51)
???T####
Treasury’s Administrative Record (Dkt. 1:13-cv- 1025, ECF No. 26)
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 8 of 40
INTEREST OF AMICI CURIAE1
Amici Louise Rafter, Josephine and Stephen Rattien, and Pershing Square Capital Management, L.P. are common shareholders of Fannie and Freddie. Mrs. Rafter, a retired nurse, owns Fannie common stock. Mrs. Rattien, a retired psychiatric social worker and inner-city school counselor, and Dr. Rattien, a retired senior science and technology poli- cy manager, jointly own Fannie common stock. Pershing Square is the Companies’ largest common shareholder, with an approximate 10% stake in the outstanding common stock of each.
Amici have a direct and distinct interest in this appeal. Their own complaint challenging the Net Worth Sweeps is pending in the Court of Federal Claims. Rafter v. United States, No. 14-740 (Fed. Cl. Aug. 14, 2014). That complaint includes Fifth Amendment takings claims.
Amici respectfully submit this brief in support of reversal to address the key takings issues that must inform this Court’s statutory interpre- tation.
STATUTES
The applicable statutes are contained in the Institutional Plaintiffs’ Addendum of Pertinent Authorities.
1 No counsel for a party authored this brief in whole or in part, nor did any person or entity—other than Amici or their counsel—financially contribute to its preparation or submission.
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 9 of 40
INTRODUCTION
This is a straightforward statutory-interpretation case. Appellants have shown that HERA’s plain text and ordinary canons of construction reflect common sense: A conservator conserves. It cannot siphon off and expropriate, each quarter, all profits of a company it is supposed to conserve. Through the Net Worth Sweeps, FHFA acts as an anti- conservator. The Net Worth Sweeps thus plainly exceed and are contra- ry to FHFA’s statutorily-prescribed authority as conservator.
The constitutional-avoidance canon reinforces this plain reading of HERA. Indeed, it would compel the Court to adopt that reading even if the opposite view had any merit. The canon’s function is well- established: “‘where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly con- trary to the intent of Congress.’” Solid Waste Agency of N. Cook Cnty. v. U.S. Army Corps of Eng’rs, 531 U.S. 159, 173 (2001) (citation omitted); Waterview Mgmt. Co. v. FDIC, 105 F.3d 696, 701-02 (D.C. Cir. 1997).
Adopting the Government’s and the district court’s interpretation of HERA and permitting the Net Worth Sweeps to continue would give rise to takings claims under the Fifth Amendment. The Sweeps are quintessential direct appropriations of Amici’s and other shareholders’ property by the Government. Even if analyzed under the rubric for regulatory takings, the Net Worth Sweeps require just compensation.
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 10 of 40
The district court’s contrary opinion on the takings issue was sub- stantively incorrect, and its potential ramifications are astounding. Ac- cording to that court, once the Government places an entity into conser- vatorship or receivership, it has carte blanche to do whatever it wants with the entity’s assets, including—as this case demonstrates— extracting every cent of profit for its own use. That result contradicts Fifth Amendment jurisprudence.
As shown below, the Net Worth Sweeps are takings in violation of the Fifth Amendment. At the very least, they raise serious questions under the Takings Clause. The avoidance canon thus requires the common- sense conclusion that the Sweeps exceed and contradict the conserva- tor’s statutory powers and limits. E.g., Waterview, 105 F.3d 696.
The district court held that it lacked jurisdiction over any takings claims. Op.43. Having reached this conclusion, the court had no power to “proceed at all in any cause.” Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94 (1998).2 This Court accordingly also lacks jurisdiction to adjudicate any takings claims directly here. The Takings Clause, how- ever, must guide the Court’s resolution of the statutory question that is properly presented.
2 “Jurisdiction is power to declare the law, and when it ceases to exist, the only function remaining to the court is that of announcing the fact and dismissing the cause.” Id.
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 11 of 40
Neither Appellants nor Amici challenge FHFA’s appointment as con- servator, only its belated imposition of the confiscatory Net Worth Sweeps. Amici do not deny that the Companies were in a weakened condition during the financial crisis of 2007-08. The Government, how- ever, made the carefully considered decision to place them into conser- vatorship, apparently believing they could be restored to strength with some assistance. Having made that financial and public-policy judg- ment, the Government obligated itself to abide by statutorily-limited powers and duties. The Government also protected itself with carefully prescribed, stringent terms—including warrants to purchase 79.9% of each Company’s common stock, quarterly dividend payments at an an- nual rate of 10% in cash or 12% in kind, and a first-priority liquidation preference—just like a private lender choosing to assist a struggling company that it believes could recover.
With the Net Worth Sweeps, however, the Government has aban- doned the limitations Congress placed on the conservator’s powers and responsibilities, choosing instead simply to take the Companies’ entire net worth every quarter (less a diminishing capital reserve that zeroes out by 2018). It is as if the lender, having assisted the struggling com- pany, then tried to take the entire company once it regained its footing. The owners obviously would have a basis for objecting; the lender’s pri- or assistance does not give it a right to anything more than what it re- quired as a condition of making the loan. In the same way, the Gov-
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 12 of 40
ernment’s initial assistance to the Companies in no way supports its subsequent decision to seize everything they earn, every quarter. It is this change in course that gives rise to Appellants’ and Amici’s claims.
ARGUMENT
I. The Court Must Interpret HERA So As To Avoid Serious Constitutional Questions Under The Takings Clause.
A. The central question on appeal is whether HERA authorizes FHFA, as the Companies’ conservator, to take all of the Companies’ profits, each quarter, in perpetuity, and sweep them to Treasury. The Court must determine whether in so doing FHFA acts “beyond, or con- trary to, its statutorily prescribed, constitutionally permitted, powers or functions.” Nat’l Trust for Historic Pres. v. FDIC, 21 F.3d 469, 472 (D.C. Cir. 1994) (Wald, J., concurring) (referring to 12 U.S.C. § 1821(j)); see al- so, e.g., Cnty. of Sonoma v. FHFA, 710 F.3d 987, 992 (9th Cir. 2013).
Appellants demonstrate why the plain text of HERA, interpreted ac- cording to ordinary canons of construction, shows that the Net Worth Sweeps violate the Government’s statutory powers and functions. (Inst.Pl.Br. 33-43.) The most common definition of the word conservator is a “guardian, protector, or preserver.” Conservator, Black’s Law Dic- tionary (10th ed. 2014). Stripping the Companies of their profits, much less for the Government’s own use, runs directly contrary to this role.
Congress incorporated this plain meaning into HERA, as the statute, read as a whole, confirms. See generally 2A Sutherland’s Statutes and
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 13 of 40
Statutory Construction § 47.02 (7th ed. 2014). HERA authorizes FHFA to place the Companies into either conservatorship or receivership in certain circumstances. It carefully distinguishes between FHFA’s pow- ers as a conservator and as a receiver, delineating that as a conservator, FHFA’s powers include such action as may be necessary to “put the [Companies] in a sound and solvent condition,” “carry on” their business, and “preserve and conserve” their “assets and property.” 12 U.S.C. § 4617(b)(2)(D) (emphases added). HERA gives a conservator no au- thority to expropriate the Companies’ net worth, which would be mani- festly contrary to those powers the statute does accord.
In contrast, it is only as a receiver—and not as a conservator—that FHFA receives the “additional power[]” to “place [the Companies] in liq- uidation.” 12 U.S.C. § 4617(b)(2)(E). Even then, however, HERA does not authorize the Net Worth Sweeps. Moreover, FHFA’s appointment as receiver would trigger a host of substantive and procedural protections for shareholders. Receivership, for example, carries an immediate right to judicial review. HERA also spells out a detailed process and prioriti- zation for a receiver to determine claims against a Company, preserving shareholders’ rights to the Companies’ residual value and again includ- ing a right to judicial review. 12 U.S.C. § 4617(b)(2)(E), (b)(2)(K)(i), (b)(3), (c)(1)(D). Thus, by stripping the Companies of all profits while holding them in conservatorship, the Government not only is violating the conservator’s statutory powers, but is doing so in a way that pur-
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posefully avoids the statutory protections Congress established for a liquidation under a receivership—including judicial review.
B. Even if the textual analysis set forth above were insufficient to resolve the interpretive questions under HERA, the canon of constitu- tional avoidance would compel the conclusion that the Net Worth Sweeps are contrary to FHFA’s statutory powers as conservator.
The avoidance canon applies with full force when the Takings Clause is the implicated constitutional provision. This Court’s decision in Waterview, invoking the avoidance canon to interpret a statute involv- ing oversight of the mortgage-finance industry, makes this clear. Like FHFA here, the RTC in Waterview interpreted its charter statute (FIRREA) as permitting it to ignore underlying property rights in its disposition of a regulated entity’s assets. 105 F.3d at 701. This Court, however, concluded that reading FIRREA “to permit a federal agency acting as conservator or receiver to sell assets in disregard of all pre- receivership rights[] raises significant constitutional questions under the takings clause.” Id. The Court thus adopted a “reading of the stat- ute [that] avoids th[ose] question[s].” Id. at 702.3
3 The avoidance canon trumps Chevron deference. Courts “only de- fer ... to agency interpretations of statutes that, applying the normal ‘tools of statutory construction,’ are ambiguous.” I.N.S. v. St. Cyr, 533 U.S. 289, 320 n.45 (2001) (quoting Chevron USA, Inc. v. N.R.D.C., Inc., 467 U.S. 837, 843 n.9 (1984) (emphasis added)). Since the avoidance canon resolves any possible ambiguity in HERA, there is no “gap for the agency to fill.” 467 U.S. at 843.
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The Net Worth Sweeps raise constitutional questions that are even more threatening to Fifth Amendment rights than were the RTC’s ac- tions in Waterview. There, it was an “open question” whether the right at issue—“an option to purchase land”—was protectable property under the Fifth Amendment. Id. at 701-02. It also was “not at all clear” that the RTC’s conduct had caused the plaintiff to “sustain[] any compensa- ble damages.” Id. at 702. Here, in contrast, the property right at issue is well-established and the harm is demonstrably compensable. Infra.
Indeed, the need for avoidance is magnified where the Takings Clause is implicated, given that Clause’s role in protecting the separa- tion of powers. As this Court has recognized, when an agency’s inter- pretation of a statute would raise questions under the Takings Clause, “use of a narrowing construction prevents executive encroachment on Congress’s exclusive powers to raise revenue and to appropriate funds.” Bell Atl. Tel. Companies v. F.C.C., 24 F.3d 1441, 1445 (D.C. Cir. 1994). These concerns are acutely applicable here; with each Net Worth Sweep, Treasury raises off-budget revenue without appropriation by Congress or (it claims) judicial oversight.
Accordingly, because “property interests cannot be regulated out of existence without compensation,” the avoidance canon further buttress- es Appellants’ argument that HERA does not authorize the Net Worth Sweeps. Waterview, 105 F.3d at 702.
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II. The Net Worth Sweeps Are Takings Without Compensation. The Government’s interpretation of HERA as authorizing the Net
Worth Sweeps “raises significant constitutional questions under the takings clause.” Id. at 701. The Court must interpret HERA to avoid these questions. Id.; United States v. Sec. Indus. Bank, 459 U.S. 70, 78 (1982) (invoking canon to avoid reading of Bankruptcy Act that would destroy pre-enactment property rights and give rise to takings claims).
A. Conservatorships Do Not Eliminate Shareholders’ Property Interest In Their Stock.
The district court correctly recognized that shareholders have a property interest in their stock even if the company they own is subject to the possibility of a conservatorship, and consequently, they have a right to assert a takings claim if a conservatorship is improperly im- posed. (Op.45 n.50.) The district court nonetheless illogically concluded that, although shareholders have a property interest in challenging im- proper appointment of a conservator, they have no right to challenge even blatantly improper actions by a conservator.
According to the district court, this counterintuitive rule comes from two Federal Circuit cases purportedly establishing that, at the moment a conservator is properly appointed, shareholders’ property rights are somehow extinguished. (Op.45.) Consequently, the conservator can lit- erally do anything it wants with a company’s assets, and for any rea- son—the conservator’s “motives are irrelevant”—because shareholders “possess no cognizable property interests” after appointment of a con-
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servator. (Id.) Thus, the district court’s ruling would apparently allow a conservator to use a company’s assets to build highways, subsidize ag- riculture, or perhaps even buy the conservator a beach house; any obli- gations to restore the company to solvency and to conserve its assets and property can be blithely ignored.
This view is contrary to basic property rights, HERA, and the very cases the district court relied upon.
1. The district court’s distinction between improper conservatorships and improper acts by a conservator makes no sense. As the court recog- nized, shareholders have a property right to stop a conservator from wrongly intruding on an entity. The court thus rightly rejected the “alarmist assertion” that the Government can take over stable entities. (Op.45 n.51.) A conservator’s intrusion, however, does not end with its appointment; the intrusion continues with the conservator’s actions. Thus, just as shareholders have a right to resist jeopardizing the eco- nomic value of their stock by an improper appointment of a conservator, so too may they resist evisceration of the economic value of their stock by improper conservator acts that bleed the company dry while in the legally mandated process of regaining stability.4 Abusing a conserva-
4 This is true even in the more extreme situation of liquidation. In bankruptcy, a corporation’s equity owners retain any liquidation sur- plus. A fortiori, an owner whose company is put into conservatorship— for the express purpose of being restored to solvency—retains an inter- est in that property throughout the life of the conservatorship.
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torship contrary to the conservator’s statutory authority is no different from improperly imposing one in the first place. The entire purpose of a conservatorship is to nurse a company back to health so that it can again provide value to its constituents, including its shareholders. It would make no sense for Congress to subject companies to this onerous process if it did not intend the owners to end up with a stabilized insti- tution once the conservatorship ended.
2. The district court’s view that shareholders’ property interests are extinguished by a conservator’s appointment is unsupported by—indeed, contrary to—Golden Pacific Bancorp v. United States, 15 F.3d 1066 (Fed. Cir. 1994), and California Housing Securities, Inc. v. United States, 959 F.2d 955 (Fed. Cir. 1992). Neither decision could possibly have estab- lished a rule that shareholders lack a compensable property right to re- sist improper actions by a properly appointed conservator, because both cases involved challenges to being placed into conservatorship or receiv- ership—not to allegedly improper conservator actions.5
Moreover, the reasoning of those decisions clearly confirms a proper- ty right to challenge manifestly improper conservator actions. As the district court itself recognized, these cases merely state that, because shareholders knew about the “specter of conservatorship” when they
5 Because neither Appellants nor Amici challenge FHFA’s appoint- ment as conservator, the analogy would be if, in Golden Pacific and Cal- ifornia Housing, the Government seized profits from ongoing, solvent banks, rather than taking over insolvent entities to protect creditors.
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purchased the stock, this deprived them of the normal “right to exclude the government from [their] property at those times when the govern- ment could legally impose a conservatorship.” (Op.43-44 (quoting Gold- en Pac., 15 F.3d at 1074 (emphasis added)).) Thus, shareholders’ proper- ty interests in the stock did not give them a right to resist a proper, le- gal receivership: they “could not have reasonably expected that the government ‘would fail to enforce the applicable statutes and regula- tions,’” and so such valid enforcement actions “could not possibly have interfered with a reasonable investment-backed expectation.” 15 F.3d at 1074.6 Nor could the shareholders invoke a per se rule against physical invasions of real property merely because the banks’ physical property (the buildings) was seized as a consequence of this proper receivership.
6 Indeed, in both decisions, the Federal Circuit repeatedly empha- sized that its conclusion applied only to actions taken by a proper re- ceiver. See id. (“At those times when the Comptroller could legally in- spect the Bank or place it in receivership, the Bank ... was unable to exclude the government from its property.” (emphases added)); id. (“The actions of the Comptroller simply enforced ‘portions of an extensive reg- ulatory scheme ....’” (citation omitted)); id. (“Golden Pacific’s expecta- tions could only have been that the FDIC would exert control over the Bank’s assets if the Comptroller became satisfied that the Bank was in- solvent and chose to place it in receivership.”); id. at 1069 (noting that a district court had concluded that the Comptroller of the Currency acted “within the scope of his statutory authority”); Cal. Housing, 959 F.2d at 958 (“Saratoga lacked the fundamental right to exclude the government from its property at those times when the government could legally im- pose a conservatorship or receivership ....” (emphases added)); id. at 959 (“Saratoga gave the government the right, among other rights, to place Saratoga in conservatorship or receivership when warranted.” (empha- sis added)); id. (“Saratoga ... foresaw the government’s occupation of its premises under the circumstances present here .....” (emphasis added)).
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Id. at 1073-74; Cal Housing, 959 F.2d at 958. Obviously, if the share- holders had no right to resist seizure of the money in the bank’s vaults, they had no separate right to forestall seizure of the vaults themselves simply because they are real property.
The key distinction in the Federal Circuit cases, then, is between proper, legal conservatorships and improper, illegal ones—not between a conservator’s appointment and its later actions. There is no hint in either opinion that shareholders lack the right to challenge an improper conservator, or that a right to challenge statute-violating government action somehow evaporates post-appointment. At the most basic level, either of those outcomes would be illogical and contrary to the very na- ture of “conservatorship.” A conservator’s job is to protect and preserve the value of property interests, including those of the shareholders.
In sum, Golden Pacific and California Housing make clear that shareholders possess property interests in their stock relative to con- servators or receivers, which is why both courts assessed the plaintiffs’ “reasonable investment-backed expectations” under the regulatory- takings test of Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978). Under that analysis, both courts determined that it was perfectly consistent with the “applicable statutes and regulations” for the entities to be placed in receivership. Here, however, the Net Worth Sweeps run directly contrary to the applicable statute (and to federal conservatorship law and the practice of federal conservators
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more generally). Appellants and Amici have a right to challenge the Government’s taking of their property through improper conservator ac- tions, just as the shareholders in Golden Pacific and California Housing had a right to challenge the improper appointment of a receiver.7
3. This is particularly obvious because HERA establishes not just standards for when a conservator can be appointed, but also limits on the conservator’s powers and duties. 12 U.S.C. § 4617(a)(3), (b)(2)(D). Thus, just as shareholders would have the right to object if a conserva- tor were appointed for a stable entity, they have a right to object to con- servator actions that violate the statutory duty to attempt to restore an entity to stability and preserve its assets.
Indeed, in the early years of the conservatorships, even FHFA readily recognized these common-sense constraints on its powers, and the con- tinuing property rights of the shareholders. When FHFA placed the Companies into conservatorship, it publicly underscored that “[s]tockholders will continue to retain all rights in the stock’s financial worth.” FHFA, Questions and Answers on Conservatorship (Sept. 7,
7 Accordingly, the district court erred in reading those decisions as es- tablishing that shareholders lack any property interest. Instead, they merely rejected an absolute interest in real property under Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), which would have required just compensation even for a perfectly legal conserva- torship. Indeed, it is only because shareholders have a property inter- est in their stock that, as the district court acknowledged, they can sell that stock. (Op.48.)
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2008) (emphasis added). In congressional testimony later that month, FHFA’s director stated that FHFA would act as a conservator only “until [the Companies] are stabilized.” Turmoil in U.S. Credit Markets: Hear- ing Before Senate Committee on Banking, Housing, and Urban Affairs, 2008 WL 4325397 (2008) (statement of James B. Lockhart III).
In 2009, FHFA’s director again emphasized that “[a]s the conservator, FHFA’s most important goal is to preserve the assets of Fannie Mae and Freddie Mac over the conservatorship period. That is our statutory re- sponsibility.” The Present Condition and Future Status of Fannie Mae and Freddie Mac: Hearing Before the Subcomm. of Capital Markets, Ins. & Gov’t Sponsored Enters of H. Comm. on Fin. Servs., 111th Cong. 11 (2009) (statement of James B. Lockhart, III) (emphases added).
FHFA again recognized shareholders’ continuing rights when it prom-
ulgated a rule implementing HERA’s conservatorship and receivership
provisions in June 2011. In its rulemaking notice, FHFA explained that
HERA did not authorize it as conservator to deplete an entity’s assets:
As one of the primary objectives of conservatorship of a regulated entity would be restoring that regulated entity to a sound and sol- vent condition, allowing capital distributions to deplete the enti- ty’s conservatorship assets would be inconsistent with the agency’s statutory goals, as they would result in removing capital at a time when the Conservator is charged with rehabilitating the regulated entity.
76 Fed. Reg. 35724, 35727 (June 20, 2011) (emphasis added). Several months later, FHFA’s director told the Senate: “By law, the conserva- torships are intended to rehabilitate the [Companies] as private firms.”
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Letter from Edward J. DeMarco, Dir., FHFA, to Senate (Nov. 10, 2011) (emphases added).
4. This common-sense reading of HERA was and remains correct.
It is undisputed that the common stock is not terminated under con- servatorship. Common shareholders retain the same ownership claim to the Companies as before, which includes the same position in the queue relative to, for example, creditors or preferred shareholders.
Shareholders have a constitutionally protected property interest in any surplus—even a contingent surplus—from a Government- administered receivership. First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1288, 1296 (Fed. Cir. 1999) (following Cal- ifornia Housing to hold that shareholder in regulated entity can raise takings claim because it “has a property interest in any eventual liqui- dation surplus”). Therefore, contrary to the district court’s position be- low that rights are extinguished, even in the receivership context a re- ceiver could not liquidate a company and then simply take any liquida- tion surplus—which is legally shareholders’ property—without being subject to takings claims. A fortiori, the Government cannot, in a con- servatorship, strip from common shareholders all economic value in their stock—contrary to the conservator’s explicit statutory mandate and powers—and then assert that it is not subject to takings claims.
The creation and execution of the Net Worth Sweeps do not present the question whether FHFA properly exercised its discretion as conser-
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vator. Stripping the Companies of all of their profits every quarter and sweeping those profits to Treasury is an utter abandonment of the stat- utory powers and limits of the conservator. Amici and other sharehold- ers manifestly have property rights in their proportional ownership of the Companies. Where the Government has acted contrary to its statu- tory charge and powers as conservator, they have the ability to protect those rights through takings claims.
B. The Net Worth Sweeps Constitute Takings Under Any Mode Of Analysis.
There are three ways the Government commits a taking: by directly appropriating property, physically invading real property, or regulating owners’ use of their property. Lingle v. Chevron USA Inc., 544 U.S. 528, 537 (2005). The first two are “paradigmatic taking[s]”: the Government takes property, in the most literal sense. Id. A regulatory taking, by contrast, does not involve actually seizing anything; rather, the Gov- ernment regulates how the owner can use that property, diminishing the property’s value. Given that the owner retains possession, and that virtually every regulation affects someone’s property use, the Supreme Court has declined to hold that any regulation constitutes a taking. In- stead, the question is whether a regulation “goes too far.” Pa. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922). A regulation will go “too far” if it de- prives a property owner of all economically beneficial use, and therefore
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is “tantamount to a direct appropriation or ouster,” or if it fails the three-part Penn Central balancing test. Lingle, 544 U.S. at 537-39.
The district court’s foundational error lay in its misunderstanding of this framework, and in its view that the paradigmatic taking can only occur when real property is involved. (Op.47-48.) That notion finds no support in the law.
In Lingle, the Supreme Court expressly recognized that the “para- digmatic taking” can be either “a direct government appropriation or physical invasion of private property.” 544 U.S. at 537 (emphasis added). The Court has long eschewed the view that only real property can be subject to a paradigmatic taking—indeed, just this Term, it forcefully rejected any such distinction. In Horne v. Department of Agriculture, after surveying the Takings Clause’s history and its own jurisprudence, the Court reaffirmed “the established rule of treating direct appropria- tions of real and personal property alike.” No. 14-275, slip op. at 8 (U.S. June 22, 2015). “The Government has a categorical duty to pay just compensation when it takes your car, just as when it takes your home.” Id. at 5.
Thus, if the Government appropriates private property, whatever its form, there is no need for further inquiry: compensation must be paid. Courts “do not ask ... whether [the taking] deprives the owner of all economically valuable use.” Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 535 U.S. 302, 323 (2002). Nor does it matter
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whether the Government keeps the property or passes it to some third party. Brown v. Legal Found. of Wash., 538 U.S. 216, 235 (2003).
Accordingly, the Supreme Court has found a taking when, for in- stance, the Government seized part of a warehouse General Motors had leased (United States v. Gen. Motors Corp., 323 U.S. 373, 382-84 (1945)); when a county took the interest on court fees paid into a bank account (Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 163-64 (1980)); when a State required lawyers to deposit client funds into IOLTA accounts and transferred the interest to charity (Brown, 538 U.S. at 235)8; and when Government planes used private airspace to approach a Gov- ernment airport (United States v. Causby, 328 U.S. 256, 267 (1946)).
In all of these cases, the property owner retained economically bene- ficial use: G.M. kept “some 93,000 square feet” of the warehouse it had leased (323 U.S. at 375); the plaintiffs in Webb’s and Brown recovered their principal (449 U.S. at 158; 538 U.S. at 224); and the Causby plain- tiff could use his property as anything but a chicken farm (328 U.S. at 259). The Government’s actions in each case also served laudable pur- poses: aiding the wartime effort (General Motors and Causby), support- ing charity (Brown), and increasing the public fisc (Webb’s).
8 No compensation was required in Brown because, under the chal- lenged program, interest on client funds could be taken only if the funds had been paid into the wrong account—the owner’s loss was zero so long as the law was obeyed. Id. at 240. This did not change the fact that, if owners could have suffered loss under the law, they would have been entitled to compensation. Id. at 235.
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Those considerations, however, did not change the fact that takings had occurred, because the Government had expropriated private prop- erty for itself. See, e.g., Webb’s, 449 U.S. at 163-64 (“The county’s ap- propriation of the beneficial use of the fund is analogous to the appro- priation of the use of private property in [Causby].”). The plaintiffs thus did not need to show deprivation of all economically beneficial use or satisfy the Penn Central balancing test. Similarly, if the Government took $100 from every U.S. bank account that contained more than that, no one would think it permissible because the Government did not take every cent, or because it gave the money to a worthy cause.
As explained below, the Net Worth Sweeps are direct appropriations requiring just compensation. Even if they are assessed as regulatory takings, however, the result is the same: just compensation is required.
1. The Net Worth Sweeps Are Direct Government Appropriations Of Private Property.
The Net Worth Sweeps epitomize the “paradigmatic taking”: “a di- rect government appropriation ... of private property.” Lingle, 544 U.S. at 537. Each quarter, with no end in sight, the Government takes the Companies’ net worth for its own use. Under our Constitution, that is a taking.
This conclusion in no way hinges on whether the Government actual- ly takes legal title to the stock. A taking occurs if the Government takes funds “linked to a specific, identifiable property interest such as a bank
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account.” Koontz v. St. Johns River Water Mgmt. Dist., 133 S. Ct. 2586, 2600 (2013). After all, taking the money in a bank account is no differ- ent from taking title to the account; the account is just a mechanism for accessing the money. Webb’s, 449 U.S. at 163-64; Phillips v. Wash. Le- gal Found., 524 U.S. 156, 172 (1998). Similarly, the Government takes the property right created by a contract by withholding the funds owed under the contract. Lynch v. United States, 292 U.S. 571, 579 (1934). It makes no difference whether the Government allows the owner to keep the piece of paper linked to the funds—i.e., the title to the account or the contract. The property is the financial claim to which the paper en- titles its owner. Thus, just compensation is required when the Govern- ment impairs that claim, regardless of whether it takes the paper.
The implications for stock ownership are readily apparent. A stock certificate is a mechanism for accessing the economic value that inheres in proportional ownership of the company.9 A shareholder has a claim on their pro rata share of the company’s net assets. Moreover, just as the owner of principal in a bank account also owns the interest that ac- crues on that principal, since interest “follows the principal” (Webb’s, 449 U.S. at 162), a shareholder owns a proportional claim to increases in the company’s value—if the company pays out earnings as dividends
9 See 2 Cox & Hazen on Corporations 718 (2d ed. 2003) (“A share of stock is primarily a profit-sharing contract, a unit of interest in the cor- poration based on a contribution to the corporate capital.”); Golden Pac., 15 F.3d at 1073 (recognizing “shares of stock” as “property”).
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orreinveststhem,forexample. Ineithercase,thestockgrantsitsholder a property right to benefit proportionately from the company’s success.
Here, the Government “direct[ly] appropriat[es]” the Companies’ net worth every quarter. Lingle, 544 U.S. at 537. If the district court were correct that HERA allows this, the statute would give rise to a clear vio- lation of the Takings Clause, and just compensation would be required.
2. Even If The Net Worth Sweeps Are Assessed As Regulatory Takings, Compensation Is Required.
For the above reasons, the Net Worth Sweeps effect a direct appro- priation of private property, and there is no need to turn to regulatory- takings analysis. Even if viewed as a regulatory taking, however, the Sweeps violate the Fifth Amendment.
a. The Sweeps deprive the Companies’ shareholders of “all economi- cally beneficial use” of their stock, thus obviating any need for Penn Central balancing even under the regulatory-takings rubric. Id. at 538. The Government alone enjoys the right to participate in the Companies’ financial success, leaving shareholders nothing but the certificates.
The district court rejected this on the grounds that shareholders’ ability to sell their stock is an economically beneficial use. This is wrong.
First, the ability to sell stock, without more, is not an economically beneficial use. Where the Government has gutted property of its “under- lying economic uses,” it makes no sense to treat the sale of that property as an economic use. Lost Tree Vill. Corp. v. United States, No. 14-5093,
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__ F.3d __, 2015 WL 3448943, *5 (Fed. Cir. June 1, 2015). As the Feder- al Circuit recognized in a land case, “[t]ypical economic uses enable a landowner to derive benefits from land ownership rather than requiring a landowner to sell the affected parcel.” Id. So, too, the “typical econom- ic use” of stock enables its holder, an owner of a company, to realize the benefits of the company’s economic value, and not just to sell the stock. Selling the right not to participate in the Companies’ earnings (since the Government takes all of those earnings, in perpetuity) is not an econom- ically beneficial use. Whatever limited value there is in being able to sell the stock, the Government cannot escape its obligation to pay just compensation by leaving property owners a “token interest.” Palazzolo v. Rhode Island, 533 U.S. 606, 631 (2001); Horne, slip op. at 9-10.
Second, it is always possible to sell property the Government has rendered currently valueless, so long as there is hope that the depriva- tion will cease and the value will be restored. The Government cannot escape liability for a taking simply because some investors purchase shares in hope that the taking will be reversed. Lost Tree, 2015 WL 3448943, *6. Here, the Net Worth Sweep takings could end under court order or because the Government voluntarily ceases the deprivations, perhaps under a new Administration or a congressional enactment re- quiring such a termination. This obviously does not change the fact that currently, the Government is taking private property.
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b. Accordingly, there is no need to consider the Penn Central balanc- ing test. Even if that test were applied, however, its three factors—(1) “investment-backed expectations”; (2) “economic impact”; and (3) “the character of the governmental action,” 438 U.S. at 124—confirm that just compensation is required.
First, for the reasons above, Appellants and Amici have strong “in- vestment-backed expectations” that their ownership stake in the Com- panies’ assets would not be deliberately dissipated by one required to conserve those assets, for the Government’s direct benefit. “[T]he exist- ence of a property interest is determined by reference to existing rules or understandings that stem from an independent source such as state law.” Phillips, 524 U.S. at 164.
The district court’s decision to the contrary rested on an even more extreme version of its property-interest analysis—namely, that anyone investing in a “closely regulated” industry must expect that the Gov- ernment could improperly seize their property at its whim. (Op.49-50.) In the court’s view, the Companies’ stock essentially contained a hidden covenant stating that it would be subject to seizure whenever the Gov- ernment sees fit, making all shareholders merely conditional owners. This is plainly erroneous for the reasons already stated: investors have no reason to expect that the Government will violate its statutory con- servatorship duties, and are instead entitled to expect compliance. Su- pra at II.A.
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To be sure, the regulatory context can affect the reasonableness of in- vestors’ expectations. As courts have long recognized, however, the key word in this tautology is affect; the regulatory context does not extin- guish investment-backed expectations: “A business that operates in a heavily-regulated industry should reasonably expect certain types of regulatory changes that may affect the value of its investments. But that does not mean that all regulatory changes are reasonably foresee- able or that regulated businesses can have no reasonable investment- backed expectations whatsoever.” Cienega Gardens v. United States, 331 F.3d 1319, 1350 (Fed. Cir. 2003) (HUD-subsidized housing); see also, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 998 (1984) (pesticides); United Nuclear Corp. v. United States, 912 F.2d 1432, 1436 (Fed. Cir. 1990) (uranium mining). Shareholders could not reasonably have ex- pected that FHFA, as purported conservator, would go far beyond its statutorily-prescribed powers, let alone that FHFA could continue down this path indefinitely.
Second, the “economic impact” of the Net Worth Sweeps is total for the common shareholder, the economic value of whose stock is eliminat- ed. This flies in the face of the basic law the Government once recog- nized, that under HERA common shareholders retain all rights in the stock’s financial worth even in conservatorship.
Under the Sweeps, the Companies’ net worth is taken every quarter. Shareholders are completely barred from receiving any money from the
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Companies in the form of dividends, or from realizing the gains that would result if the Companies could reinvest their earnings, or from an- ything else that could provide economic value to shareholders. The Sweeps do nothing to decrease the Government’s liquidation prefer- ences in the Companies, which stand at $189.5 billion. Nor do they af- fect the Government’s warrants to purchase up to 79.9% of each Com- pany’s common stock. The upshot is that the Sweeps destroy the com- mon shares’ entire economic value, now and until they are stopped.
The Sweeps’ scale is vast. The Government has already stripped the Companies of hundreds of billions of dollars, which is more than the amount saved through “sequestration,” and more than the annual GDPs of 140 countries. To date, the Government’s dividends amount to over $40 billion more than the Government invested in the Companies.
Third, the “character of the governmental action” is naked self- dealing. Although the district court expressly refused to allow the fact- finding that it recognized “would likely [be] need[ed]” to fully assess the character of the Sweeps (Op.50), the flagrancy of the Government’s con- duct is readily apparent. Through the Sweeps, the Government takes the Companies’ profits and puts them in its own coffers. The Sweeps al- so have the benefit—for the Government—of generating significant off- budget revenue, without political accountability for tax hikes or spend- ing cuts.
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The timing of the Net Worth Sweep Amendment bolsters this conclu- sion. The Government decided to impose the Sweeps just when the Companies returned to strong profitability. By mid-August 2012, both Companies had reported profits for at least the prior two quarters. Nei- ther was drawing on its commitment from Treasury. It also was or should have been evident that accounting principles would require the Companies to greatly increase the value of their assets and decrease their multi-billion-dollar loss reserves, thus recapturing most of the value lost in the preceding years, including the write-down of deferred tax assets. (Both Companies had said as much.)
Moreover, the Net Worth Sweeps achieve what an internal 2010 Treasury memorandum characterized as the Administration’s “com- mitment ... [to] ensur[ing] existing common equity holders will not have access to any positive earnings.” (T0202.) Since 2008, the Government has held warrants to purchase 79.9% of the Companies’ common stock for a nominal price, which were designed to provide the Government “potential future upside.” At the moment the Companies became and would continue to be strongly profitable, rather than exercising its war- rants, the Government decided just to take all of the Companies’ profits, every quarter. In so doing, the Government accomplished two purposes: taking all of that money for itself, in perpetuity, and depriving the common shareholders of any economic value in their shares. Such indi- cations of bad faith only bolster the conclusion that the Government’s
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conduct constitutes a taking. See, e.g., Tahoe-Sierra, 535 U.S. at 333 (noting that “were it not for the findings of the District Court that [the governmental entity] acted diligently and in good faith, we might have concluded that the agency was stalling” and found a taking).
Nonetheless, the Government insists that the Sweeps were necessary to end the so-called “downward spiral” of the Companies borrowing from Treasury to pay Treasury. This rationalization does not withstand even passing scrutiny. Treasury’s stock gave it the right to have dividend payments added to its liquidation preference—at a slightly higher rate—instead of continually receiving those dividends in cash. The Government thus had options for responding even when the Companies were unable to pay dividends without drawing on Treasury. In any event, the Companies’ inability to timely pay the Government at one time is not a basis for taking their money even when they have no trou- ble making payments. There is no nexus between the Government’s in- terest in being made whole and its decision to take literally all of the economic value of the Companies’ equity. If the “downward spiral” were anything other than a pretext, the Government would have—at the very least—terminated the Sweeps when the Companies had paid dividends to Treasury in excess of the amounts they borrowed. That point has long since passed, Treasury having received dividends amounting to over $40 billion more than it invested in the Companies. (Inst.Pl.Br.2.)
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In sum, even if the Government were not directly appropriating Ap- pellants’ and Amici’s property, and even if it were not depriving them of all economically beneficial use, all three Penn Central factors would weigh in favor of finding a regulatory taking. Given “the magnitude of” the Sweeps’ “economic impact and the degree to which [they] interfere[] with legitimate property interests,” the Government’s asserted justifica- tions could not save its case even if credited. See Lingle, 544 U.S. at 540 (noting that the first two Penn Central factors weigh more heavily in the analysis); Ruckelshaus, 467 U.S. at 1005 (the “investment-backed expectations” factor can be “so overwhelming” as to be dispositive).
CONCLUSION
The Net Worth Sweeps violate the Fifth Amendment. However, the Court does not need to make that determination. It suffices that adopt- ing the Government’s and the district court’s interpretation of HERA would raise profound questions under the Takings Clause. The Court is obligated to avoid those questions if possible. Here, that is easy to do. The Court need only interpret the statute to require FHFA, in its role as conservator, to in fact act as conservator. The decision below should be reversed.
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Dated: July 6, 2015
Respectfully submitted,
/s/ James E. Gauch Thomas F. Cullen Jr. Michael A. Carvin James E. Gauch Lawrence D. Rosenberg Paul V. Lettow
JONES DAY
51 Louisiana Avenue, N.W. Washington, DC 20001 Telephone: (202) 879-3939 jegauch@jonesday.com
Counsel for Amici Curiae
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CERTIFICATE REGARDING SEPARATE BRIEFING
I am aware that others intend to submit amicus briefs in support of Appellants. I hereby certify, in accordance with D.C. Circuit Rule 29(d), that it is necessary for Amici to file this separate brief in light of their distinct interest in this appeal, given that Amici are pursuing a sepa- rate challenge to the Net Worth Sweeps in the Court of Federal Claims. Amici’s CFC complaint asserts (among other things) Fifth Amendment takings claims, giving Amici unique insight into the substantial consti- tutional issues that affect the statutory-interpretation questions Appel- lants have raised in this appeal. Amici have limited their brief to ad- dressing only this relationship between takings analysis and the statu- tory-interpretation questions.
Dated: July 6, 2015
/s/ James E. Gauch James E. Gauch
JONES DAY
51 Louisiana Avenue, N.W. Washington, DC 20001 Telephone: (202) 879-3939 jegauch@jonesday.com
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 39 of 40
CERTIFICATE OF COMPLIANCE
I hereby certify, in accordance with Federal Rule of Appellate Proce- dure 32(a)(7)(C), that this brief complies with the type-volume limita- tion of Federal Rule 29(d) because it contains 6,947 words (excluding the parts exempted by Federal Rule 32(a)(7)(B)(iii) and Circuit Rule 32(e)(1)), as determined by the word-count function of Microsoft Word.
I further certify that this brief complies with the typeface require- ments of Federal Rule 32(a)(5) and the type-style requirements of Fed- eral Rule 32(a)(6) because it was prepared in 14-point Century School- book font using Microsoft Word.
Dated: July 6, 2015
/s/ James E. Gauch James E. Gauch
JONES DAY
51 Louisiana Avenue, N.W. Washington, DC 20001 Telephone: (202) 879-3939 jegauch@jonesday.com
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USCA Case #14-5243 Document #1561149 Filed: 07/06/2015 Page 40 of 40
CERTIFICATE OF SERVICE
I hereby certify, in accordance with Federal Rule of Appellate Proce- dure 25(c), that on July 6, 2015, the foregoing was electronically filed with the Clerk of the Court using the CM/ECF system, which will send a notification to the attorneys of record in this matter, who are regis- tered with the Court’s CM/ECF system.
Dated: July 6, 2015
/s/ James E. Gauch James E. Gauch
JONES DAY
51 Louisiana Avenue, N.W. Washington, DC 20001 Telephone: (202) 879-3939 jegauch@jonesday.com
?- 33 -
IU Hosts Teleconference to Provide Update on Fannie, Freddie Litigation
WASHINGTON – On Thursday, July 9 at 2:30pm EDT, Investors Unite Executive Director Tim Pagliara will host a teleconference to update Investors Unite members and the media on the most recent developments in Fannie Mae and Freddie Mac investors' efforts to enforce their rights as shareholders in the GSEs. Pagliara will be joined by Matthew D. McGill, partner at Gibson, Dunn & Crutcher representing Perry Capital, and Richard Epstein, the Laurence A. Tisch Professor of Law at New York University, senior fellow at the Hoover Institution of Stanford University and professor emeritus and a senior lecturer at the University of Chicago.
To join the teleconference, please RSVP to media@investorsunite.org.
WHO:
Tim Pagliara, Investors Unite Executive Director, CapWealth Advisors Chairman and CEO
Matthew D. McGill, Partner, Gibson Dunn and Crutcher
Richard Epstein, New York University Law Professor, Senior Fellow at the Hoover Institution, professor emeritus and a senior lecturer at the University of Chicago
WHAT: IU Hosts Teleconference to Provide Update on Fannie, Freddie Litigation
WHEN: Thursday, July 9 at 2:30pm EDT
DIAL: (800) 230-1951
NOTE: Please RSVP to media@investorsunite.org
About Investors Unite: Formed by Tennessee investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite (investorsunite.org) is a coalition of over 1,400 private investors from all walks of life, committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac. The coalition works to educate shareholders and lawmakers on the importance of adopting GSE reform that fully respects the legal rights of Fannie Mae and Freddie Mac shareholders and offers full restitution on investments.
P.O. Box 2591
Brentwood, TN 37024
More Perry Capital appeal filings
07/06/2015 NOTICE filed [1561148] by Louise Rafter, Josephine and Stephen Rattien, and Pershing Square Capital Management, L.P. of intention to participate as amicus curiae. [Disclosure Listing: Attached] [Service Date: 07/06/2015 ] [14-5243, 14-5254, 14-5260, 14-5262] (Gauch, James)
07/06/2015 AMICUS FOR APPELLANT BRIEF [1561149] filed by [Service Date: 07/06/2015 ] Length of Brief: 6,947 Words. [14-5243, 14-5254, 14-5260, 14-5262] (Gauch, James)
07/06/2015 CONSENT AMICUS FOR APPELLANT BRIEF [1561151] filed by [Service Date: 07/06/2015 ] Length of Brief: 3692 words. [14-5243, 14-5254, 14-5260, 14-5262] (Grant, Eric)
Here's the whole TH brief, happy reading!!
ORAL ARGUMENT NOT YET SCHEDULED
Nos. 14-5243 (L), 14-5254 (con.), 14-5260 (con.), 14-5262 (con.)
IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
PERRY CAPITAL LLC, for and on behalf of investment funds for which it acts as investment advisor,
Plaintiff-Appellant,
v.
JACOB J. LEW, in his official capacity as the Secretary of the Department of the Treasury, MELVIN L. WATT, in his official capacity as Director of the Federal Housing Finance Agency, UNITED STATES DEPARTMENT OF THE TREASURY, and FEDERAL HOUSING FINANCE AGENCY,
Defendants-Appellees.
On Appeal From The United States District Court For The District Of Columbia No. 1:13-cv-01053-RCL
BRIEF AMICI CURIAE OF TIMOTHY HOWARD AND THE COALITION FOR MORTGAGE SECURITY IN SUPPORT OF APPELLANTS
?????Dated: July 6, 2015
Thomas R. McCarthy*
CONSOVOY MCCARTHY PARK PLLC 3033 Wilson Boulevard
Suite 700
Arlington, VA 22201
Tel: (703) 243-9423
Fax: (703) 243-9423
Email: tom@consovoymccarthy.com *Counsel of Record
Counsel for Amici Curiae
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 2 of 46
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
Pursuant to D.C. Circuit Rule 28(a)(1), Timothy Howard and the Coalition for Mortgage Security certify that:
(A) Parties and Amici
In addition to the parties and amici listed in the Appellants’ Opening Brief, the following amici may have an interest in the outcome of this case:
Timothy Howard
The Coalition for Mortgage Security
(B) RulingsunderReview
References to the rulings at issue appear in the Appellants’ Opening Brief. (C) Related Cases
References to the related cases appear in the Appellants’ Opening Brief.
/s/ Thomas R. McCarthy
Thomas R. McCarthy
CONSOVOY MCCARTHY PARK PLLC 3033 Wilson Boulevard
Suite 700
Arlington, VA 22201
Tel: (703) 243-9423
Fax: (703) 243-9423 Email:tom@consovoymccarthy.com
Counsel for Amici Curiae
i
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USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 3 of 46
STATEMENT REGARDING CONSENT TO FILE AND SEPARATE BRIEFING
All parties have consented to the filing of this brief.1 Timothy Howard filed a notice of intent to participate as amicus curiae on June 30, 2015. The Coalition for Mortgage Security elected to join the brief after that date.
Pursuant to D.C. Circuit Rule 29(d), amici curiae Timothy Howard and the
Coalition for Mortgage Security (“Amici”) state that they are aware of only one
other planned amicus brief in support of Appellants, which is to be filed by the
Independent Community Bankers of America, the Association of Mortgage
Investors, Mr. William M. Isaac, and Robert H. Hartheimer. Counsel for Amici
understands that amicus group to be representing the interests of corporate
stakeholders in Fannie Mae and Freddie Mac and addressing their amicus brief to
the due process concerns arising from a conservator’s acting in a manner that robs
shareholders of their equity interests in a company. Amici, on the other hand, focus
their brief on the facts relating to the government’s placement of Fannie and
Freddie into conservatorship, framed in the light of Mr. Howard’s experiences and
perspective as the former Chief Financial Officer of Fannie Mae. Amici believe
1
???Pursuant to Fed. R. App. P. 29(c), amici curiae state that no counsel for a party authored this brief in whole or in part, and no counsel or party made a monetary contribution intended to fund the preparation or submission of this brief. No person other than amici curiae or their counsel made a monetary contribution to its preparation or submission.
-ii-
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 4 of 46
that separate briefing will thus aid the Court’s consideration of the issues presented here.
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USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 5 of 46
CORPORATE DISCLOSURE STATEMENT
Pursuant to Fed. R. App. P. 26.1 and Circuit Rules 26.1 and 29(b), amicus curiae the Coalition for Mortgage Security hereby submits the following corporate disclosure statement:
The Coalition for Mortgage Security is a nonprofit 501(c)(4) organization. It is not a publicly held corporation and no corporation or other publicly held entity owns more than 10% of its stock.
/s/ Thomas R. McCarthy
Thomas R. McCarthy
CONSOVOY MCCARTHY PARK PLLC 3033 Wilson Boulevard
Suite 700
Arlington, VA 22201
Tel: (703) 243-9423
Fax: (703) 243-9423 Email:tom@consovoymccarthy.com
Counsel for Amici Curiae
??-iv-
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 6 of 46
TABLE OF CONTENTS
?Page
?CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES ............ i
STATEMENT REGARDING CONSENT TO FILE AND SEPARATE BRIEFING .................................................................................................... ii
CORPORATE DISCLOSURE STATEMENT ...................................................... iv TABLE OF AUTHORITIES................................................................................... v GLOSSARY ............................................................................................................ x INTEREST OF AMICI CURIAE............................................................................. 1 INTRODUCTION AND SUMMARY OF THE ARGUMENT ............................. 3 ARGUMENT........................................................................................................... 7
I. THE CONSERVATORSHIPS OF FANNIE MAE AND FREDDIE
MAC WERE PLANNED BY TREASURY WELL IN ADVANCE. .......... 7
II. TREASURY’S INTERVENTION WITH FANNIE MAE AND
FREDDIE MAC WAS NOT A RESCUE................................................... 13
III. THE SENIOR PREFERRED STOCK USED TO ASSIST FANNIE
MAE AND FREDDIE MAC HAD NO PRECEDENT IN
FINANCIAL REGULATION..................................................................... 15
IV. THE OVERWHELMING MAJORITY OF FANNIE MAE’S AND FREDDIE MAC’S 2008-2011 LOSSES RESULTED FROM NON-
CASH ACCOUNTING ENTRIES BOOKED FOLLOWING THE CONSERVATORSHIPS. ........................................................................... 17
V. THE THIRD AMENDMENT TO THE PSPA WAS ADOPTED TO PREVENT FANNIE MAE AND FREDDIE MAC FROM
BENEFITING FROM THE REVERSAL OF DISCRETIONARY ACCOUNTING LOSSES TAKEN EARLIER........................................... 26
VI. THE COMPENSATION TREASURY GRANTED ITSELF UPON TAKING OVER FANNIE MAE AND FREDDIE MAC WAS
GROSSLY DISPROPORTIONATE TO THE ECONOMIC RISK IT FACED........................................................................................................ 29
CONCLUSION ..................................................................................................... 32 CERTIFICATE OF COMPLIANCE..................................................................... 34
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CERTIFICATE OF SERVICE.............................................................................. 35
vi
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Cases
TABLE OF AUTHORITIES
?Marcum v. Salazar,
751 F. Supp. 2d 74 (D.D.C. 2010) .......................................................................3
*Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 229 (1983) .............................................................................................4
Texas Rural Legal Aid, Inc. v. Legal Servs. Corp.,
940 F.2d 685 (D.C. Cir. 1991) .............................................................................3
Statutes
5 U.S.C. § 706 ...........................................................................................................3
The Housing and Economic Recovery Act of 2008, Pub. L. 110-289, 122 Stat. 2654 (2008)
Section 1101 .......................................................................................................11 Section 1367 .................................................................................................11, 12
Other Authorities
Bank of America 2009 Annual Report, available at http://media.corporate- ir.net/media_files/irol/71/71595/reports/2009_AR.pdf................................19, 21
Bank of America 2011 Annual Report, available at http:// media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf..............20, 21
D. Solomon, S. Reddy, & S. Craig, Mounting Woes Left Officials with Little Room to Maneuver, Wall St. J. (Sept. 8, 2008), available at http://www.wsj.com/articles/SB122083060663308415.....................................13
* Authorities upon which we chiefly rely are marked with asterisks. vii
Page
?
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 9 of 46
Email from J. Thomas to R. Steel of March 8, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/Search.Videos:0/ Search.Documents:1/Search.endmonth:02...........................................................8
FDIC Statistics on Banking, available at https://www2.fdic.gov/sdi/sob/..............30
FNMA 2008 2Q 10-Q Investor Summary (Aug. 8, 2008),
available at http://www.slideshare.net/finance6/
fannie-mae-investor-summary ............................................................................23
*FNMA 10-K (FY2007)....................................................................................17, 19
*FNMA 10-K (FY2008)........................................................................17, 20, 23, 24
*FNMA 10-K (FY2009)................................................17, 18, 19, 20, 21, 22, 24, 30
*FNMA 10-K (FY2011)................................................17, 18, 19, 20, 21, 22, 23, 30
*FNMA 10-K (FY2014)..............................................................................22, 29, 30
FNMA 10-Q (2007 Q2)...........................................................................................27
FNMA 10-Q (2008 Q2)...........................................................................................24
FNMA 10-Q (2012 Q2)...........................................................................................27
FHLMC 2007 Annual Report (Feb. 28, 2008) ........................................................17
FHLMC 10-K (FY2008) .........................................................................................17
*FHLMC 10-K (FY2009) .................................................................................17, 18
*FHLMC 10-K (FY2011) ...........................................................................17, 18, 30
*FHLMC 10-K (FY2014) .................................................................................29, 30
Henry Paulson, On The Brink: Inside the Race to Stop the Collapse of the Global Financial System 149 (New York: Business Plus, 2010).......................11, 13, 15
J. Laing, Is Fannie Mae the Next Government Bailout?, Barron’s,
(Mar. 10, 2008), available at http://online.barrons.com/article/ SB120493962895621231.html#articleTabs_panel_article%3D1 ....................8, 9
viii
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 10 of 46
Letter from C. Dickerson to D. Mudd of Aug. 22, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/ Search.Videos:0/Search.Documents:1/Search.endmonth:02 .............................12
Letter from C. Dickerson to D. Mudd of Sept. 4, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/ Search.Videos:0/Search.Documents:1/Search.endmonth:02 .............................13
Letter from C. Dickerson to R. Syron of Aug. 22, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/ Search.Videos:0/Search.Documents:1/Search.endmonth:02 .............................13
Letter from C. Dickerson to R. Syron of Sept. 4, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/ Search.Videos:0/Search.Documents:1/Search.endmonth:02 .............................12
Letter from R. DeValk to Hon. C. Grassley of April 21, 2015 ...............................30
News Release, Fannie Mae Reports Second Quarter 2008 Results (Aug. 8, 2008), available at http://www.fanniemae.com/resources/ file/ir/pdf/quarterly-annual-results/2008/q22008_release.pdf ............................15
News Release, Freddie Mac Releases Second Quarter 2008 Financial Results (Aug. 6, 2008), available at www.freddiemac.com/news/ archives/investors/2008/2q08er.html..................................................................15
R. Teitelbaum, How Paulson Gave Hedge Funds Advance Word of Fannie Rescue, Bloomberg Business (Nov. 29, 2011), available at http:// www.bloomberg.com/news/articles/2011-11-29/how-henry-paulson-gave- hedge-funds-advance-word-of-2008-fannie-mae-rescue. ..................................11
S. Labaton & S. Weisman, U.S. Weighs Takeover of Two Mortgage Giants, N.Y. Times (July 11, 2008), available at http://www.nytimes.com/2008/07/11/ business/11fannie.html?pagewanted=print&_r=0..............................................11
The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Jan. 2011), available at http://fcic-static.law.stanford.edu/c dn_media/fcic-reports/fcic_final_report_full.pdf ...............................................10
Timothy Howard, The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream (2014)...............................................14
ix
USCA Case #14-5243
Document #1561146 Filed: 07/06/2015 Page 11 of 46
?The Companies
The Institutional Plaintiffs HERA
FHFA
OFHEO
The Net Worth Sweep
PSPA Treasury
GLOSSARY
Federal National Mortgage Association (a.k.a. “FNMA” or “Fannie” or “Fannie Mae”) and Federal Home Loan Mortgage Corporation (a.k.a. “FHLMC” or “Freddie” or “Freddie Mac”)
Appellants Perry Capital LLC, Arrowood Indemnity Co., et al., and Fairholme Funds Inc., et al.
The Housing and Economic Recovery Act of 2008, Pub. L. 110-289, 122 Stat. 2654 (2008)
Federal Housing Finance Agency
Office of Federal Housing Enterprise Oversight
The Third Amendment to the Senior Preferred Stock Purchase Agreements between the United States Department of the Treasury and the Federal Housing Finance Agency, as conservator to The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, dated August 17, 2012
Preferred Stock Purchase Agreement United States Department of the Treasury
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INTEREST OF AMICI CURIAE
Timothy Howard was Fannie Mae’s Chief Financial Officer from February
1990 until January 2005. During that time, he was responsible for the company’s finance and risk management activities, as well as strategic and business planning and financial reporting and accounting. Mr. Howard also had line responsibility for Fannie Mae’s largest business—its mortgage portfolio. In 2013, Mr. Howard published a book on the financial crisis titled The Mortgage Wars.
Mr. Howard’s detailed knowledge of Fannie’s operations, risks, and accounting—together with his experience at the company in the years during which the seeds of the 2008 mortgage crisis were sown—gives him a unique perspective on what occurred in the financial markets in general and with Fannie specifically in the times leading up to, during, and following the crisis. Much has been written and said about these events that is incorrect, and can be readily disproven with facts that are verifiable and incontrovertible but are either not widely known, ignored, or misrepresented.
Mr. Howard’s interest is in ensuring that the Court, when it addresses this case, has an accurate understanding of the relevant facts concerning the government’s placement of Fannie and Freddie into conservatorship.
The Coalition for Mortgage Security is a tax-exempt, 501(c)(4) organization
whose mission is to educate the public on the need for fundamental reform of the 1
?
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 13 of 46
?American housing finance system. The Coalition is guided by three principles: (1) Replace Fannie and Freddie with private companies funded by private capital, without any special privileges or a Federal Charter; (2) Protect and ensure the continued availability and affordability of the 30-year fixed rate mortgage, which is the main engine of the housing market and the primary avenue for sustainable homeownership; and (3) The rule of law is the basis for American Capitalism and must be acknowledged and respected in order for properly functioning capital markets. This is the cornerstone for attracting private capital to any market, especially the housing finance market. The rules of the game cannot be changed in the middle of an inning.
The Coalition opposes the government’s effective nationalization of Fannie and Freddie and its wiping out of private shareholders in the process. The Coalition’s interest in this case is in ensuring that the Court has before it an accurate understanding of the facts as it considers the lawfulness of the Net Worth Sweep.
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USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 14 of 46
INTRODUCTION AND SUMMARY OF THE ARGUMENT
This case concerns the effective nationalization of Fannie Mae and Freddie Mac by the Federal Housing Finance Agency (“FHFA”) and the Department of the Treasury (“Treasury”). Appellants challenged this agency action under the APA and various other causes of action. In dismissing all of Appellants’ claims, the district court relied on a factual record that was both incomplete and at the same time improperly supplemented by post hoc factual assertions. And the district court improperly made factual determinations on a motion to dismiss based on the defective record and “without giving Appellants the opportunity to contest the completeness of that record or to present [contrary] evidence.” Initial Opening Brief for Institutional Plaintiffs (“Institutional Plaintiffs”) at 70.
Judicial review of agency action under the APA is “ordinarily confined to the administrative record.” Texas Rural Legal Aid, Inc. v. Legal Servs. Corp., 940 F.2d 685, 698 (D.C. Cir. 1991) (quotation omitted); 5 U.S.C. § 706. Accordingly, “[a] court should consider neither more nor less than what was before the agency at the time it made its decision.” Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010). Yet the administrative record here was “doubly flawed,” Institutional Plaintiffs at 70, as the district court considered both more and less than “what was before” Treasury and FHFA at the time they made the decisions at issue.
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Neither Treasury nor FHFA submitted a complete administrative record to the court. Treasury omitted important documents from its administrative record, and FHFA did not even submit its administrative record to the court. Id. at 21, 68, 70. Not only was the record far less than required, but it was also more than permissible, as FHFA attempted to shore up the agencies’ factual insufficiencies with the post hoc declaration of an agency official. Id. at 72.
The court below disregarded these record defects, reasoning that Treasury’s and FHFA’s rationales for the challenged agency action “do not matter.” (Op. 21- 22.) But disregarding an agency’s rationale is contrary to bedrock administrative law. Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 229, 42-43 (1983). Moreover, by ignoring the “underlying motives or opinions” of Treasury and FHFA, (Op. 21-22), the court could not fully evaluate whether FHFA was acting within its statutory authority as conservator. Institutional Plaintiffs at 73-74.
The district court compounded its error by relying on facts outside of the complaints to resolve factual disputes relating to jurisdiction without ever affording Appellants an opportunity to develop and present evidence relevant to the jurisdictional inquiry. Id. at 76. This error is especially problematic because the “jurisdictional facts alleged are inseparable from facts central to the merits.” Id.
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Amici agree with Appellants that these errors “warrant reversal and remand.” Id. at 70. Amici write separately to highlight several important facts relating to FHFA’s and Treasury’s placement of Fannie and Freddie into conservatorship, facts that bear on both the jurisdictional and merits questions at issue here and that Appellants could have put before the Court had they been afforded the opportunity to present evidence.
As explained more fully below, the placement of Fannie and Freddie into conservatorship by FHFA was planned well in advance by Treasury. Unlike the rescues of various commercial and investment banks at around the same time, Treasury directed FHFA to place Fannie and Freddie into conservatorship not in response to any imminent threat of failure, but rather for policy reasons and over the objections of Fannie’s and Freddie’s boards.
Once in conservatorship, the Companies’ managements had no role in negotiating the terms on which they would be offered assistance; Treasury and FHFA set these terms unilaterally. They included a requirement that any shortfalls in the Companies’ book capital be covered with “draws” of senior preferred stock that never could be repaid, meaning Fannie and Freddie had to pay a dividend to Treasury of 10 percent after-tax in cash, or 12 percent in kind, in perpetuity, on their highest amounts of senior preferred stock outstanding at any one time. This unprecedented non-repayment feature gave Treasury and FHFA an extremely
5
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strong incentive to make accounting choices for the Companies that accelerated or exaggerated their expenses and greatly increased their losses, in order to create a large and permanent flow of revenue to Treasury.
Between the time Fannie and Freddie were put into conservatorship and the end of 2011, well over $300 billion in non-cash accounting expenses were recorded on their income statements. These non-cash expenses, most of which were discretionary, eliminated all of the Companies’ capital and forced them, together, to take $187 billion from Treasury.
But because accelerated or exaggerated expenses cause losses that are only temporary, Fannie’s and Freddie’s non-cash losses began to reverse themselves in 2012. Coupled with profits resulting from a rebounding housing market, the reversal of these losses enabled both Companies to report in August 2012 sufficient second quarter income to not only pay their dividends to Treasury but also retain a total of $3.9 billion in capital.
As soon as it became apparent that a large percentage of the non-cash accounting losses booked during the previous four years was about to come back into income, Treasury and FHFA entered into the Third Amendment to the PSPA. The Third Amendment substituted for the fixed dividend payment a requirement that all future earnings—including reversals of accounting-related expenses incurred earlier—be remitted to Treasury. From the time the Third Amendment
6
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 18 of 46
took effect through the end of 2014, Fannie and Freddie paid Treasury $170 billion, $133 billion more than they would have owed absent the Amendment.
Fannie and Freddie never were in danger of failing because of a lack of liquidity, and the mortgages they owned or guaranteed had loss rates one-third as high as the mortgages held by banks. Yet Treasury imposed far more onerous terms on Fannie and Freddie than on commercial banks that required assistance. Treasury’s effective nationalization of Fannie and Freddie was a policy decision, and the compensation Treasury granted itself upon taking over Fannie and Freddie was grossly disproportionate to the true economic risk it faced, both at the time and subsequently.
ARGUMENT
I. THE CONSERVATORSHIPS OF FANNIE MAE AND FREDDIE MAC WERE PLANNED BY TREASURY WELL IN ADVANCE.
Treasury officials have stated that the decision to place Fannie and Freddie under government control was made after the Housing and Economic Recovery Act (HERA) was signed on July 30, 2008, and only shortly before the conservatorships were announced. Readily available facts, however, do not support that contention.
In the early 2000s, Treasury and the Federal Reserve undertook a series of actions, including a reduction in bank risk-based capital requirements, designed to promote the use of private-label securities—securities issued by companies other
???7
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 19 of 46
than Fannie, Freddie, or the Government National Mortgage Association—as an alternative to residential mortgage financing by those companies. Private-label issuance became the dominant form of mortgage securitization in 2004, but in late 2007, the private-label market collapsed amidst an explosion of delinquencies and defaults. The result was a sharp fall-off in mortgage availability, to which Congress responded in February of 2008 by nearly doubling the maximum dollar amount of individual mortgages Fannie and Freddie could finance. That gave the Companies access to the largest share of new residential mortgage loans in their history.
Within a month, a senior official at the National Economic Council, Jason
Thomas, sent a copy of a paper titled “Fannie Mae Insolvency and Its
Consequences” to Robert Steel, Undersecretary for Domestic Finance at Treasury.2
This paper had been provided to Barron’s as the basis for a negative article on
Fannie published on March 8, 2008.3 The paper and the article each opined that
because of risky loan acquisitions and four accounting treatments the paper
claimed were questionable—for deferred tax assets, low-income housing tax
2
?Email from J. Thomas to R. Steel of March 8, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/Search.Videos:0/ Search.Documents:1/Search.endmonth:02.
3
Id.; J. Laing, Is Fannie Mae the Next Government Bailout?, Barron’s, (Mar. 10, 2008), available at http://online.barrons.com/article/ SB120493962895621231.html#articleTabs_panel_article%3D1.
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credits, and the valuation of Fannie’s private-label security holdings and its guaranty obligations for mortgage-backed securities—the company was in danger of failing and might have to be nationalized.
In an email message transmitting the paper to Undersecretary Steel, Thomas wrote, “Attached is a document used as the sourcing for today’s Barron’s article on the potential collapse of Fannie Mae. I send it only to help inform potential internal Treasury discussions about the potential costs and benefits of nationalization.”4 The wording of this message makes clear that the subject of Fannie nationalization had been raised at Treasury at that early date. Moreover, the paper’s prescription for Fannie insolvency—writing down many of the company’s assets and greatly boosting its loss reserves—was a blueprint for what Treasury and FHFA would do six months later.
Just days after the Barron’s article, and on the eve of the announcement of the government-assisted acquisition of Bear Stearns by JP Morgan, Treasury Secretary Henry Paulson overrode the objections of OFHEO Director James Lockhart5 and allowed Fannie and Freddie to reduce their surplus capital percentages without any firm commitment from either company to raise additional
?4
5
of 2008.
Id.
Lockhart remained Director of FHFA when FHFA replaced OFHEO in July 9
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capital. Lockhart expressed his disapproval in an e-mail written shortly after this agreement, saying, “The idea strikes me as perverse, and I assume it would seem perverse to the markets that a regulator would agree to allow a regulatee to increase its very high mortgage credit risk leverage (not to mention increasing interest rate risk) without any new capital.”6 Paulson’s action was significant on two levels. First, it was an unmistakable example of Treasury’s dominance of FHFA. Second, allowing Fannie and Freddie to simultaneously reduce their capital and increase their risk was so starkly contrary to Treasury’s previous prescriptions for the Companies that it strongly suggests Paulson already had begun to think of them as instruments of the federal government. (Two years later, he would tell the Financial Crisis Inquiry Commission, “[Fannie and Freddie], more than anyone, were the engine we needed to get through the problem.”7)
On July 11, 2008, the New York Times published a front-page article saying, “Senior Bush administration officials are considering a plan to have the government take over one or both of [Fannie and Freddie] and place them in a
6
7
?The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States 315 (Jan. 2011), available at http://fcic-static.law.stanford.edu/c dn_media/fcic-reports/fcic_final_report_full.pdf.
Id. at 311 (emphasis added).
10
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conservatorship if their problems worsen.”8 Shares of the Companies plunged, and in response, Paulson publicly pledged support for them on July 13, saying, “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies.”9 Yet he had a very different private message for Wall Street insiders. As reported by Bloomberg in November of 2011, Paulson met with a select group of hedge fund managers at Eton Park Capital Management on July 21, where he told them Treasury was considering a plan to put Fannie and Freddie into conservatorship, which would effectively wipe out their common and preferred shareholders.10 That is precisely what happened six weeks later.
When HERA was enacted on July 30, 2008, Pub. L. 110-289, 122 Stat. 2654, it created a new regulator for Fannie and Freddie—FHFA (effectively, OFHEO renamed), id. § 1101—and gave it expanded powers to put both companies into receivership or conservatorship, id. § 1367. HERA included a
8
??S. Labaton & S. Weisman, U.S. Weighs Takeover of Two Mortgage Giants, N.Y. Times (July 11, 2008), available at http://www.nytimes.com/2008/07/11/ business/11fannie.html?pagewanted=print&_r=0.
9
Henry Paulson, On The Brink: Inside the Race to Stop the Collapse of the Global Financial System 149 (New York: Business Plus, 2010) (“On The Brink”).
10
R. Teitelbaum, How Paulson Gave Hedge Funds Advance Word of Fannie Rescue, Bloomberg Business (Nov. 29, 2011), available at http:// www.bloomberg.com/news/articles/2011-11-29/how-henry-paulson-gave-hedge- funds-advance-word-of-2008-fannie-mae-rescue.
11
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clause not present in any other regulatory statute: “The members of the board of directors of a regulated entity shall not be liable to the shareholders or creditors of the regulated entity for acquiescing in or consenting in good faith to the appointment of [FHFA] as conservator or receiver for that regulated entity.” Id. § 1367(a)(6). This clause would come into play within a matter of weeks. When Paulson met with the directors of Fannie and Freddie to inform them of his intent to take over the Companies, neither met any of the twelve conditions for conservatorship spelled out in the newly passed legislation. It is impossible to know whether Fannie’s and Freddie’s directors would have balked at Treasury’s demand that they allow their companies to be put into conservatorship without statutory cause had there not been a provision in HERA exempting them from shareholder lawsuits. Yet there can be little doubt that this provision had been placed in the statute to make forced conservatorship easier.
Treasury, however, lacked authority to put the Companies into conservatorship; only the new regulator, FHFA, could do that. And as late as August 22, 2008, FHFA had sent both Fannie and Freddie letters saying the Companies were safe and sound and exceeded their regulatory capital requirements.11 Paulson therefore directed Lockhart to change his agency’s posture
?11
Dickerson to R. Syron of Aug. 22, 2008, available at FCIC Resource Library,
Letter from C. Dickerson to D. Mudd of Aug. 22, 2008; Letter from C. 12
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on the Companies.12 Not two weeks after certifying the adequacy of the Companies’ capital, FHFA did an about-face on September 4, 2008, sending each company an extremely harsh mid-year review letter alleging weaknesses and making criticisms never before communicated to either.13 Two days later, Paulson, Lockhart, and Federal Reserve Chairman Ben Bernanke met with the Companies’ CEOs and directors to tell them they had no choice but to agree to conservatorship.14
II. TREASURY’S INTERVENTION WITH FANNIE MAE AND FREDDIE MAC WAS NOT A RESCUE.
Treasury’s actions to place Fannie and Freddie into conservatorship were fundamentally different from regulatory interventions in support of other financial institutions during the 2008 financial crisis. All of the commercial and investment bank rescues (or failures)—as well as that of AIG—occurred in response to sudden and uncontrollable liquidity crises, and had similar profiles: market perceptions of
fcic.law.stanford.edu/resource/index/page:33/Search.Videos:0/Search.Documents: 1/Search.endmonth:02.
???12 13
On The Brink, at 165.
Letter from C. Dickerson to D. Mudd of Sept. 4, 2008; Letter from C. Dickerson to R. Syron of Sept. 4, 2008, available at FCIC Resource Library, fcic.law.stanford.edu/resource/index/page:33/Search.Videos:0/Search.Documents: 1/Search.endmonth:02.
14
D. Solomon, S. Reddy, & S. Craig, Mounting Woes Left Officials with Little Room to Maneuver, Wall St. J. (Sept. 8, 2008), available at http://www.wsj.com/articles/SB122083060663308415.
13
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a sharp decline in the value of a company’s mortgage-related assets led to rapid outflows of consumer deposits, or an inability to roll over maturing short-term obligations (in the vernacular, a “run on the bank”). Depressed asset prices made it impossible for these lightly capitalized companies to replace lost deposits or maturing short-term debt by selling assets without taking losses that would have exhausted their capital. The Federal Reserve and Treasury were confronted with the need either to take immediate steps to save them—whether through massive provisions of liquidity, assisted mergers, asset guarantees, or other measures—or to allow them to fail.
Fannie and Freddie faced no similar threats. In the winter of 2000, both had agreed with Treasury, and pledged publicly, to maintain sufficient liquidity to enable them to survive at least three months without access to the debt markets.15 As a consequence of this pledge, unlike all of the other companies rescued by the government during the financial crisis, neither Fannie nor Freddie ever experienced any imminent risk of insolvency because of difficulty rolling over maturing debt. Nor did they need to sell assets at depressed prices to survive. The Companies never experienced a market crisis. Moreover, at the time they were forced into conservatorship, both exceeded their regulatory capital requirements—Fannie by
?15
Politics, and the Collapse of the American Dream 114-15 (2014).
Timothy Howard, The Mortgage Wars: Inside Fannie Mae, Big-Money 14
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$9.4 billion, and Freddie by $2.7 billion.16 Their placement into conservatorship was not a rescue; it was a policy choice by Treasury, with its timing determined by Paulson. As he said in On The Brink, he wanted to place them into conservatorship before Lehman Brothers announced a “dreadful loss” for the second quarter of 2008.17
III. THE SENIOR PREFERRED STOCK USED TO ASSIST FANNIE MAE AND FREDDIE MAC HAD NO PRECEDENT IN FINANCIAL REGULATION.
On the day Fannie and Freddie were put into conservatorship, Treasury entered into Preferred Stock Purchase Agreements (PSPAs) with FHFA, in which Treasury committed to purchase a new type of security—senior preferred stock— from Fannie and Freddie if and when requested (or “drawn”) by them to maintain a positive net worth. The stock entitled Treasury to annual dividends of 10 percent if paid in cash or 12 percent if paid in kind (i.e., by taking more senior preferred stock, thus increasing Treasury’s liquidation preference). In exchange for this commitment, Treasury received as a fee $1.0 billion in senior preferred stock from each company, together with warrants to purchase 79.9 percent of Fannie and
16
????News Release, Fannie Mae Reports Second Quarter 2008 Results at 7 (Aug. 8, 2008), available at http://www.fanniemae.com/resources/file/ir/pdf/quarterly- annual-results/2008/q22008_release.pdf; News Release, Freddie Mac Releases Second Quarter 2008 Financial Results (Aug. 6, 2008), available at www.freddiemac.com/news/archives/investors/2008/2q08er.html.
17
On The Brink, at 164.
15
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Freddie common stock at a nominal price. Neither company’s board had any input into the terms of the PSPAs, nor did they request or consent to them.
The PSPAs had one feature unique to Fannie and Freddie: draws of senior preferred stock from Treasury were not repayable, meaning that dividends on any draws had to be paid in perpetuity. No other regulator in the world, at any time or under any set of circumstances, ever had used non-repayable senior preferred stock as a vehicle for rescuing an institution in crisis, or for any other purpose.
The only plausible rationale for the non-repayment restriction was as a means of transforming temporary losses at Fannie and Freddie into permanent revenues for Treasury. As conservator, FHFA was in a position to adopt accounting conventions at the Companies that pulled non-cash expenses forward or allowed them to be recorded based on estimates. Book losses created in this fashion had to be offset with senior preferred stock, and the non-repayment feature ensured that even if the losses were reversed—or turned out to be non-existent— Treasury still received a perpetual annual dividend equal to 10 percent of the highest cumulative loss at each company (or 12 percent if the dividends were paid in kind). The mere existence of this unprecedented non-repayment feature in the PSPAs was a virtual admission that Treasury and FHFA intended to engineer a massive bunching of Fannie’s and Freddie’s expenses as soon as the conservatorship was in place—and that is exactly what transpired.
16
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IV. THE OVERWHELMING MAJORITY OF FANNIE MAE’S AND FREDDIE MAC’S 2008-2011 LOSSES RESULTED FROM NON- CASH ACCOUNTING ENTRIES BOOKED FOLLOWING THE CONSERVATORSHIPS.
As lenders limited to the residential mortgage business, Fannie and Freddie were particularly vulnerable to the home price declines that began in the summer of 2006. In the four quarters prior to their conservatorships, Fannie reported cumulative losses of $9.7 billion, while Freddie had losses of $4.7 billion. Yet both continued to meet their regulatory capital requirements throughout that time, and on June 30, 2008, Fannie had $47.0 billion in core capital and Freddie had $37.0 billion.18
The Companies were placed into conservatorship on September 6, 2008, and immediately afterward their losses spiked. From the third quarter of 2008 through the end of 2009, Fannie’s after-tax book losses totaled $126.2 billion. It posted further, much smaller, losses of $14.0 billion in 2010 and $16.9 billion in 2011. Freddie’s combined losses from the second half of 2008 through 2009 were $70.7 billion, followed by losses of $14.0 billion and $5.3 billion in 2010 and 2011, respectively.19 Together, the Companies’ losses were enough to wipe out all of
?????18
Report (Feb. 28, 2008); FHLMC 10-K (FY2008).
FNMA 10-K (FY2007); FNMA 10-K (FY2008); FHLMC 2007 Annual
19
FHLMC 10-K (FY2011).
FNMA 10-K (FY2009); FNMA 10-K (FY2011); FHLMC 10-K (FY2009); 17
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their capital and cause them to require $187 billion in draws from Treasury—$116 billion for Fannie and $71 billion for Freddie.
The popular interpretation of the Companies’ post-conservatorship losses is that they were a consequence of poor credit decisions made prior to the crisis. An analysis of their financial statements, however, tells a completely different story.
Between 2008 and 2011, Fannie and Freddie suffered a combined $101.4 billion in credit losses. Yet during that same period, their business revenues— guaranty fees plus net interest income—still were sufficient to cover both these exceptionally high credit losses and $15.5 billion in administrative expenses.20 How, then, could the Companies not only have burned through $84 billion in core capital but also have become obligated to pay $18.7 billion per year in perpetuity on $187 billion in senior preferred stock owed to Treasury? The answer: well over $300 billion in non-cash charges booked to their income statements after they were put in conservatorship and placed into the hands of FHFA.
As the larger of the two companies, Fannie Mae’s non-cash charges were the more significant. By themselves, Fannie’s 2008-2011 operating results and the new capital it raised in May 2008 would have produced core capital on December 31, 2011 of $47.8 billion, a modest increase over the $47.0 billion it held on June 30,
?20
FHLMC 10-K (FY2011).
FNMA 10-K (FY2009); FNMA 10-K (FY2011); FHLMC 10-K (FY2009); 18
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2008.21 But non-cash expenses in five accounting categories totaling $200 billion—virtually all made after the company was in conservatorship and FHFA was responsible for its decision making—turned this positive result into a yawning deficit that required $116 billion in senior preferred stock to fill.22
The five accounting categories and their associated 2008-2011 expenses were as follows:
Increase in loan loss reserves--$89.8 billion. On December 31, 2007 Fannie had a general loss reserve of $3.4 billion. Four years later, it had five categories of loss reserves totaling $93.2 billion.23
Reserving for credit losses is subjective, and can vary widely among comparable institutions. On December 31, 2011, Bank of America was the largest bank holder of residential first mortgages, with $262.3 billion, or 18 percent of the industry total.24 During the 2008-2011 period, Bank of America’s loss rate on residential mortgages was over two and a half times Fannie’s loss rate. Yet at the end of 2011, Fannie’s loss reserve as a percentage of the mortgages it owned or
?21 22
23
24
FNMA 10-K (FY2009); FNMA 10-K (FY2011).
FNMA 10-K (FY2009); FNMA 10-K (FY2011).
FNMA 10-K (FY2007); FNMA 10-K (FY2011).
Bank of America 2011 Annual Report at 77, available at http:// on Banking, available at https://www2.fdic.gov/sdi/sob/.
media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf; FDIC Statistics
19
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guaranteed was half again as large as Bank of America’s.25 Were Fannie to have had the same risk-adjusted reserve percentage as Bank of America, its loss reserves on December 31, 2011 would have been $25.7 billion—$67.5 billion less than it actually held.
Fannie Mae’s loss reserve increase came almost entirely from two sources: outsized additions to its general loss reserve and the liberal use of impairment accounting.
Under FHFA’s conservatorship, the methods and techniques Fannie used to determine the size of its general loss reserve changed radically. The company revised its loss exposure evaluation procedure to incorporate shorter historical periods for estimating default rates and loss severities, changed its loan aggregation schemes, and added a geographical component. Fannie noted in its 2008 10K that these changes, all of which were discretionary, “had a significant adverse impact on our loss reserves.”26 The company also came up with a concept called a “loss confirmation period” that permitted it to reserve against many more loans, by greatly stretching the restriction that a general loss reserve could only
25
?FNMA 10-K (FY2009); FNMA 10-K (FY2011); Bank of America 2011 Annual Report, available at http://media.corporate-ir.net/Media_Files/ IROL/71/71595/AR2011.pdf; Bank of America 2009 Annual Report, available at http://media.corporate-ir.net/media_files/irol/71/71595/reports/2009_AR.pdf.
26
FNMA 10-K (FY2008) at 94.
20
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include loans for which a liability had been incurred as of the statement date.27 By December 31, 2011, Fannie’s general loss reserve had soared from $3.4 billion to $26.3 billion.28
Impairment accounting allowed Fannie to record as immediate expenses not only credit losses that otherwise would have been booked over time but also estimates of future losses and even the present value of foregone interest payments. Fannie used impairments to add $63.2 billion to its loss reserves through the end of 2011. It put $16.3 billion in a new (and discretionary) reserve for delinquent loans purchased from mortgage-backed securities pools, and also put $46.9 billion into another new reserve for individual impairments on modifications of non- performing loans.29 Fannie’s average impairment on modified loans was 27.5 percent of the loan balance, nearly triple the 10.5 percent average impairment on Bank of America’s modified mortgages.30 Further, three quarters of Fannie’s individual impairments—$35.1 billion—were on modifications made under a controversial Treasury initiative called the Home Affordable Mortgage Program,
?27 28 29 30
FNMA 10-K (FY2011) at F24.
FNMA 10-K (FY2011).
FNMA 10-K (FY2009); FNMA 10-K (FY2011).
FNMA 10-K (FY2009); FNMA 10-K (FY2011); Bank of America 2011 Annual Report, available at http://media.corporate-ir.net/Media_Files/ IROL/71/71595/AR2011.pdf; Bank of America 2009 Annual Report, available at http://media.corporate-ir.net/media_files/irol/71/71595/reports/2009_AR.pdf.
21
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which was mandatory for Fannie and Freddie but voluntary for banks and other lenders.31
On December 31, 2014, Fannie still had $41.2 billion in reserves for impaired loans.32 Most of this amount was for mortgages that were again performing, with those reserves to be released into income over the remaining lives of the loans.
Valuation reserve for deferred tax assets--$64.1 billion. Deferred tax assets result from timing differences between when income and expense are shown in a company’s financial statements and when they are recognized for tax purposes. Creating a reserve for these assets—effectively writing them off—was a key component of the insolvency strategy discussed in the “Fannie Mae Insolvency and its Consequences” paper circulated within Treasury in March 2008. To justify doing so, Treasury and FHFA merely had to conclude that, with the large increases in the loss reserve and the other accounting write-downs they intended to incur, Fannie would not have enough taxable income to use the full value of its deferred tax assets. They made that determination almost immediately. In its 10K for the third quarter of 2008, Fannie stated, “As of September 30, we concluded that it was
more likely than not that we would not generate sufficient taxable income in the
?31 32
FNMA 10-K (FY2009); FNMA 10-K (FY2011). FNMA 10-K (FY2014).
22
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foreseeable future to realize all of our deferred tax assets.”33 It set up a deferred tax valuation reserve (a deduction from earnings) of $21.4 billion that quarter, and increased the reserve by another $9.4 billion the following quarter.34
The continued acceleration of expenses engineered by Treasury and FHFA over the next three years increased Fannie’s deferred tax assets to $64.5 billion at the end of 2011.35 The valuation reserve rose almost as much, to $64.1 billion.36 Because of the deferred tax valuation reserve, Fannie received no tax benefits on any of the non-cash expenses it incurred (or on many of its credit losses), and as a consequence the senior preferred stock it was forced to take from Treasury rose by an amount equal to the valuation reserve: $64.1 billion.
Net fair value losses--$20.1 billion. Virtually all of these “mark-to-market” losses were on derivatives used to reduce Fannie’s interest rate risk. In April 2008, Fannie elected hedge accounting for its mortgage assets, with the stated purpose of “reducing the volatility in earnings due to our derivatives mark-to-market associated with changes in interest rates.”37 As soon as Fannie was put into
?33
34
35
36
37 http://www.slideshare.net/finance6/fannie-mae-investor-summary.
FNMA 10-K (FY2008) at 95.
FNMA 10-K (FY2008).
FNMA 10-K (FY2011).
FNMA 10-K (FY2011).
FNMA 2008 2Q 10-Q Investor Summary, at 11 (Aug. 8, 2008), available at
23
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conservatorship, however, that election was reversed. In its 2008 10K, the company said, “[W]e modified our hedge accounting strategy during the third quarter of 2008 to discontinue the application of hedge accounting for mortgage loans.”38 Interest rate declines during 2008-2011 led to large mark-to-market losses on Fannie’s interest rate swaps. Mortgages hedged by those swaps rose in value at the same time, but in the absence of hedge accounting the fair value gains on the mortgages were not eligible to be taken into income; only the derivatives losses were.
Other-than-temporary impairments on private-label securities--$17.9 billion. Fannie held $63.6 billion in single-family private-label securities on June 30, 2008. Through that date the company had taken $722 million in impairments on those securities.39 After the conservatorship, it chose to take a further $17.3 billion in impairments on essentially the same portfolio.40 They included $6.1 billion for “non-credit” factors, involving price declines due to market illiquidity.41 Almost by definition, price declines due to illiquidity are temporary, yet Fannie still labeled the losses “other-than-temporary,” and took impairments on them.
?38 39 40 41
FNMA 10-K (FY2008) at 103.
FNMA 10-Q (2008 Q2).
FNMA 10-K (FY2009); FNMA 10-K (FY2011). FNMA 10-K (FY2009).
24
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Losses from partnership agreements--$8.4 billion. These losses stemmed from two decisions by Treasury. The first was the same as led to the creation of the deferred tax asset valuation reserve: that Fannie would not be profitable for the foreseeable future. When Treasury made this determination, Fannie lost the use of the tax credits from its partnership agreements but kept their net operating losses. The tax credits still had value, since they could be sold to entities that could use them, but the PSPA required FHFA to obtain Treasury consent to sell any of Fannie’s assets.42 Treasury declined to give it.
***
The $200.3 billion in non-cash expenses in the above five accounting
categories transformed a modest gain in Fannie’s 2008-2011 cash business results into losses so large the company was forced to take $116.1 billion in draws of senior preferred stock from Treasury to avoid a negative net worth. And the $19.8 billion in after-tax dividends paid on this stock through 2011—the equivalent of $30.5 billion pre-tax—brought the company’s combined 2008-2011 pre-tax non- cash losses and dividends to over $230 billion.
Had Fannie not been in conservatorship during this time it certainly would have posted some increase in its loss reserves, had some fair value losses, and
?42
Amended & Restated Senior Preferred Stock Purchase Agreement, § 5.4. 25
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booked some impairments on the private-label securities it owned. The amounts, however, would have been nowhere near those actually recorded. Indeed, a privately managed Fannie Mae may well have survived the crisis. Credit losses on loans from the bubble years, as bad as they were, did not bring the company down. It took an avalanche of non-cash accounting charges—made after Fannie was put in conservatorship and came under the control of FHFA and Treasury—to do that.
V. THE THIRD AMENDMENT TO THE PSPA WAS ADOPTED TO PREVENT FANNIE MAE AND FREDDIE MAC FROM BENEFITING FROM THE REVERSAL OF DISCRETIONARY ACCOUNTING LOSSES TAKEN EARLIER.
Treasury claims that the Third Amendment to the PSPA was essential to prevent Fannie and Freddie from entering “death spirals” of endless borrowing in order to continue to make their dividend payments. This claim fails for two reasons. First, there never could have been death spirals because the Companies’ losses were not economic; they were the result of accounting judgments, which at worst only accelerated expenses—resulting in lower levels of expense (and higher profits) in the future—and in some cases reversed and came back into income. Second, FHFA as conservator of the Companies always had the option of paying the Companies’ senior preferred stock dividends in kind rather than cash, avoiding the need to borrow.
Anyone familiar with Fannie’s and Freddie’s financial statements—and
Treasury certainly fell into that category—would have known that at the end of 26
????
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2011 the Companies were on the verge of reaping the benefits of the accelerated or artificially inflated expenses booked since the conservatorship began. For example, the $89.8 billion Fannie had added to its loss reserves since 2007 was available to absorb future credit losses. In the first half of 2012, Fannie charged all of its $8.9 billion in credit losses against that reserve, rather than against income.43 Without credit losses deducted from income, Fannie’s guaranty fees and net interest income were sufficient to return the company to profitability. In the first quarter of 2012, Fannie reported a profit of $2.7 billion, its first positive result since the second quarter of 2007.44 Then, the $5.1 billion profit it reported for the second quarter of 2012 was enough to both pay its quarterly senior preferred stock dividend of $2.9 billion and (with $0.3 billion in positive market-value adjustments to its equity account) add $2.5 billion to retained earnings.45
The second quarter of 2012 marked a clear turning point. Freddie Mac also was able to charge credit losses against its loss reserve, and it, too, reported a second quarter 2012 profit large enough to pay its senior preferred stock dividend and add to its capital. With both companies able to use their ample loss reserves to absorb current-period credit losses for at least the next few years, it was a virtual
?43 44 45
FNMA 10-Q (2012 Q2).
FNMA 10-Q (2007 Q2); FNMA 10-Q (2012 Q2). FNMA 10-Q (2012 Q2).
27
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certainty that they would be profitable enough to warrant the release of the valuation reserve on their deferred tax assets, adding still further to their profits.
Treasury, of course, knew all this; it was the entity that had engineered the Companies’ accounting losses and excessive loss reserving in the first place, following the roadmap from “Fannie Mae Insolvency and its Consequences.” It was no coincidence that Treasury and FHFA agreed to the Third Amendment to the PSPA less than two weeks after Fannie and Freddie announced their second quarter earnings. Under that Amendment, the two companies were required to give all of their future profits to Treasury instead of paying a quarterly dividend.46 The express purpose of the Third Amendment was to ensure that when the effects of Fannie’s and Freddie’s earlier accounting-related write-downs and excessive loss reserving were reversed, it would be the government, and not the Companies’ shareholders, that benefited.
From the time the Third Amendment was adopted through the end of 2014, Fannie and Freddie paid Treasury $170.2 billion as a result of the Net Worth Sweep.47 Had the original dividend payment remained in effect, Treasury would have received only $37.6 billion, while the Companies would have retained the remaining $132.6 billion.
?46 47
T4337, T4345; F4034, F4042 (§ 3).
FNMA 10-K (FY2014); FHLMC 10-K (FY2014).
28
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FHFA’s management of Fannie’s and Freddie’s payments to Treasury is revealing. When the Companies had no earnings, and could have paid their senior preferred stock dividends in kind, FHFA had them make the payments in cash, adding to their losses. Then, as soon as the Companies’ accounting losses began to reverse themselves and they became profitable again and could afford cash dividends, FHFA agreed to the Net Worth Sweep. FHFA consistently acted not to conserve the assets of Fannie and Freddie, but to maximize the revenues of Treasury.
VI. THE COMPENSATION TREASURY GRANTED ITSELF UPON TAKING OVER FANNIE MAE AND FREDDIE MAC WAS GROSSLY DISPROPORTIONATE TO THE ECONOMIC RISK IT FACED.
In an April 21, 2015 letter to Senator Charles Grassley, Treasury Acting Assistant Secretary for Legislative Affairs Randall DeValk wrote, “Treasury and the taxpayers took on enormous risk when rescuing the companies. Fannie and Freddie exist today only because Treasury provided them with billions of dollars of public funds to cover their massive investment losses during the financial crisis.”48
That statement was demonstrably incorrect. Treasury took virtually no risk in rescuing the Companies. As explained above, Fannie and Freddie were able to cover what DeValk called their “massive investment losses” with their guaranty
?????48
Letter from R. DeValk to Hon. C. Grassley of April 21, 2015, at 4. 29
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fees and the net interest income on their portfolio holdings. What they could not cover were the massive temporary accounting losses forced on them by FHFA, and converted into permanent income for Treasury through the use of non-repayable senior preferred stock.
There is no mystery about mortgage loan performance during and after the financial crisis. Solid data now exist, and they show that, from 2008 through 2014, the average loss rate on residential mortgages owned or guaranteed by Fannie and Freddie was 0.45 percent per year.49 The loss rate for residential mortgages owned by commercial banks during this same period was 1.43 percent per year—more than three times as high.50 And while estimates of loss rates on private-label mortgage-backed securities vary, all significantly exceed 2.0 percent per year, over four times the Fannie and Freddie rate. Fannie and Freddie were, by far and without doubt, the most responsible mortgage lenders prior to the crisis.
This is relevant in assessing Treasury’s compensation for “rescuing” the Companies. Compensation must be related to risk, and a comparison with Treasury’s risk and compensation in its interventions on behalf of banks underscores its extraordinarily disproportionate and punitive treatment of Fannie
49
50
?FNMA 10-K (FY2009); FNMA 10-K (FY2011); FNMA 10-K (FY2014); FHLMC 10-K (FY2009); FHLMC 10-K (FY2011); FHLMC 10-K (FY2014).
FDIC Statistics on Banking, available at https://www2.fdic.gov/sdi/sob/. 30
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 42 of 46
and Freddie. Banks assisted by Treasury were suffering life-threatening liquidity crises and needed Treasury assistance to survive; Fannie and Freddie faced no such threats to their survival and were taken over against their will. Treasury made unlimited amounts of repayable loans to the banks it rescued at pre-tax interest rates of between 2.5 and 5.0 percent; Fannie and Freddie were required to offset book capital shortfalls with non-repayable senior preferred stock from Treasury paying an after-tax dividend of 10 percent—or 15.4 percent pre-tax. Bank mortgages collateralizing Treasury loans were more than three times as risky as the mortgages held by Fannie and Freddie, yet banks could limit the cost of their Treasury assistance by repaying their loans; Fannie and Freddie were required to pay a 15.4 percent pre-tax dividend in perpetuity, based on the highest dollar amount of senior preferred stock outstanding at any one time.
Charging Fannie and Freddie three to six times what it required banks to pay for assistance the banks needed but the Companies did not need, charging that amount in perpetuity rather than until repayment, and on loans that were less than one-third as risky, was not enough for Treasury. It also took warrants for 79.9 percent of Fannie’s and Freddie’s common stock for a nominal fee—something it did not do with any commercial or investment bank it rescued—and reserved for itself the right to charge a further “periodic commitment fee” in the future.
31
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 43 of 46
The gross overcompensation exacted by Treasury from Fannie and Freddie was made possible because Treasury did not negotiate the terms of the Companies’ assistance with management, but set those terms in consultation with FHFA, an agency it controlled. Treasury did not take “enormous risk” in its dealings with the Companies. It took minimal risk, and instead used its commanding regulatory position to effectively nationalize Fannie Mae and Freddie Mac at no cost, and with great financial and policy benefits to itself.
CONCLUSION
For the foregoing reasons, the judgment of the district court should be reversed.
?32
USCA Case #14-5243
Document #1561146
Filed: 07/06/2015 Page 44 of 46
?Dated: July 6, 2015
Respectfully submitted,
By: /s/ Thomas R. McCarthy
Thomas R. McCarthy*
CONSOVOY MCCARTHY PARK PLLC 3033 Wilson Boulevard
Suite 700
Arlington, VA 22201
Tel: (703) 243-9423
Fax: (703) 243-9423
Email: tom@consovoymccarthy.com
*Counsel of Record
Counsel for Amici Curiae
33
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 45 of 46
CERTIFICATE OF COMPLIANCE
Pursuant to Fed. R. App. P. 32(a)(7)(C), I certify the following:
This brief complies with the type-volume limitations of Fed. R. App. P. 29(d) because it contains 6,955 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because it has been prepared in a proportionally spaced typeface using Microsoft Word 2010 in Times New Roman 14-point font.
/s/ Thomas R. McCarthy
Thomas R. McCarthy
CONSOVOY MCCARTHY PARK PLLC 3033 Wilson Boulevard
Suite 700
Arlington, VA 22201
Tel: (703) 243-9423
Fax: (703) 243-9423 Email:tom@consovoymccarthy.com
Counsel for Amici Curiae
??34
USCA Case #14-5243 Document #1561146 Filed: 07/06/2015 Page 46 of 46
CERTIFICATE OF SERVICE
I hereby certify that on this 6th day of July, 2015, a true and correct copy of the foregoing was filed with the Clerk of the United States Court of Appeals for the D.C. Circuit via the Court’s CM/ECF system, which will send notice of such filing to all counsel who are registered CM/ECF users.
/s/ Thomas R. McCarthy
Thomas R. McCarthy
CONSOVOY MCCARTHY PARK PLLC 3033 Wilson Boulevard
Suite 700
Arlington, VA 22201
Tel: (703) 243-9423
Fax: (703) 243-9423 Email:tom@consovoymccarthy.com
Counsel for Amici Curiae
??35
H, Table of contents from that Tim Howard brief ARGUMENT........................................................................................................... 7
I. THE CONSERVATORSHIPS OF FANNIE MAE AND FREDDIE
MAC WERE PLANNED BY TREASURY WELL IN ADVANCE. .......... 7
II. TREASURY’S INTERVENTION WITH FANNIE MAE AND
FREDDIE MAC WAS NOT A RESCUE................................................... 13
III. THE SENIOR PREFERRED STOCK USED TO ASSIST FANNIE
MAE AND FREDDIE MAC HAD NO PRECEDENT IN
FINANCIAL REGULATION..................................................................... 15
IV. THE OVERWHELMING MAJORITY OF FANNIE MAE’S AND FREDDIE MAC’S 2008-2011 LOSSES RESULTED FROM NON-
CASH ACCOUNTING ENTRIES BOOKED FOLLOWING THE CONSERVATORSHIPS. ........................................................................... 17
V. THE THIRD AMENDMENT TO THE PSPA WAS ADOPTED TO PREVENT FANNIE MAE AND FREDDIE MAC FROM
BENEFITING FROM THE REVERSAL OF DISCRETIONARY ACCOUNTING LOSSES TAKEN EARLIER........................................... 26
VI. THE COMPENSATION TREASURY GRANTED ITSELF UPON TAKING OVER FANNIE MAE AND FREDDIE MAC WAS
GROSSLY DISPROPORTIONATE TO THE ECONOMIC RISK IT FACED........................................................................................................ 29
07/06/201 AMICUS FOR APPELLANT BRIEF [1561146] filed by Timothy Howard in 14-5243, 14-5254, 14-5260, 14-5262 [Service Date: 07/06/2015 ] Length of Brief: 6,955 words. [14-5243, 14-5254, 14-5260, 14-5262] (McCarthy, Thomas)
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CERTIFICATEAS TO PARIES, RULINGs, AND RELATEDCASES
A. Except for the amici curiae listed below, all parties, inter'enOrS, and amici who
have appeared before the District Court and in this Court are listed in the Initial )
Opening Brief For Institutional Plaintiffs:
Investors Unite
The Independent Community Bankers of America ("ICBA") Timothy Howard ?
B and C. The Rulings Under Review and Related Cases are set forth in the Initial l
Opening Brief For Institutional Plaintiffs.
That was hard to read,H. Here's the new Perry schedule again.
Briefs for Appellees Treasury and FHFA: September 14, 2015
Reply Briefs for Appellants: October 26, 2015
Deferred Appendix: November 9, 2015
Final Briefs: November 30, 2015
They extended the dates a bit in the Perry appeal.
DEFENDANTS-APPELLEES’ UNOPPOSED MOTION FOR A 30-DAY EXTENSION OF TIME IN WHICH TO FILE RESPONSE BRIEFS
Pursuant to Federal Rule of Appellate Procedure 27 and D.C. Circuit Rules 27(h) and 28(e), defendants-appellees Department of the Treasury and the Federal Housing Finance Agency (FHFA), respectfully request a 30-day extension of time, from August 14, 2015, to and including September 14, 2015, in which to file their response briefs in these cases. This is defendants-appellees’ first request for an extension. Plaintiffs-appellants consent to this request, provided that the Court adopts the amended briefing schedule set forth below.
1. These consolidated cases raise a number of challenges to actions taken by Treasury and FHFA to address the operation of the conservatorships of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
USCA Case #14-5243 Document #1560877 Filed: 07/02/2015 Page 2 of 5
Corporation (Freddie Mac). The district court granted defendants’ motions to dismiss plaintiffs’ claims. Plaintiffs, a collection of individual and institutional investors, brought this appeal in October 2014.
2. On May 6, 2015, this Court entered its initial briefing schedule. Under that schedule, plaintiffs were permitted two opening briefs, one for the institutional plaintiffs and one for the class plaintiffs, with both briefs due on June 30, 2015. Plaintiffs filed their opening briefs on June 29, 2015, and June 30, 2015. Defendants have consented to the filing of several amicus briefs on plaintiffs’ behalf. Those briefs are due July 7, 2015.
Under the current schedule, the briefs of defendants Treasury and FHFA, who were also permitted separate briefs, are due on August 14, 2015. Defendants have not previously sought an extension of their briefing time.
3. The requested 30-day extension is necessary in light of other pressing appellate matters for which government counsel are responsible, the number and complexity of issues raised by plaintiffs in their opening briefs, and the need to review and coordinate defendants’ responses to issues raised by amici.
The attorneys with primary responsibility for representing Treasury in this appeal are Mark Stern, Abby Wright, and Gerard Sinzdak. They will be occupied with other pressing matters during the briefing period, including: Hotze v. Burwell, No. 14- 20039 (5th Cir.) (response to en banc petition due July 6, 2015); The School of the Ozarks
v. U.S. Dep’t of Health & Human Services, No. 15-1330 (8th Cir.) (brief due July 8, 2015); 2
USCA Case #14-5243 Document #1560877 Filed: 07/02/2015 Page 3 of 5
Christian & Missionary Alliance Foundation, Inc. v. Burwell, No. 15-11437 (11th Cir.) (brief due July 13, 2015); Mance v. Lynch, No. 14-10311 (5th Cir.) (brief due July 13, 2015); Silverado Stages, Inc. v. FMCSA, No. 14-1298 (D.C. Cir.) (brief due July 15, 2015); Serna v. Transport Workers Union of America, No. 15-103828 (5th Cir.) (brief due July 20, 2015); Nesbitt v. Army Corps of Engineers, No.14-36049 (9th Cir.) (brief due July 22, 2015); United States v. Zadeh, No. 15-10195 (5th Cir.) (brief due August 10, 2015); Callaham v. United States, No. 13-2073 (4th Cir.) (brief due August 12, 2015).
4. Counsel for defendants have consulted with counsel for plaintiffs. Plaintiffs consent to this motion, provided that the deadline for filing their reply briefs is extended to October 26, 2015. Accordingly, we request that the Court enter the following briefing schedule:
Briefs for Appellees Treasury and FHFA: Reply Briefs for Appellants:
Deferred Appendix:
Final Briefs:
September 14, 2015 October 26, 2015 November 9, 2015 November 30, 2015
3
USCA Case #14-5243 Document #1560877 Filed: 07/02/2015 Page 4 of 5
CONCLUSION
For the foregoing reasons, this Court should extend the time for filing the defendants-appellees’ briefs by 30 days, to and including September 14, 2015, and amend the briefing schedule as set forth above.
Howard N. Cayne Asim Varma
David B. Bergman Michael A.F. Johnson Dirk C. Phillips
Ian S. Hoffman
ARNOLD & PORTER LLP 555 Twelfth Street, NW Washington, DC 20004
(202) 942-5000
(202) 942-5999 (fax) Howard.Cayne@aporter.com
Attorneys for Appellee Federal Housing Finance Agency
JULY 2015
Respectfully submitted,
MARK B. STERN (202) 514-5089
ABBY C. WRIGHT (202) 514-0664
s/ Gerard Sinzdak GERARD SINZDAK
(202) 514-0718
Attorneys
Civil Division, Appellate Staff
U.S. Department of Justice
950 Pennsylvania Ave., N.W., Rm. 7242 Washington, D.C. 20530
Attorneys for Appellee Department of the Treasury
?4
USCA Case #14-5243 Document #1560877 Filed: 07/02/2015 Page 5 of 5
CERTIFICATE OF SERVICE
I hereby certify that on July 2, 2015, I filed and served the foregoing with the Clerk of the Court by causing a copy to be electronically filed via the appellate CM/ECF system. I also hereby certify that the participants in the case are registered CM/ECF users and will be served via the CM/ECF system.
s/ Gerard Sinzdak Gerard Sinzdak
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Here's table of contents from 60plus brief :)
ARGUMENT ............................................................................................................5
THE DISTRICT COURT DECISION MISPERCEIVED AND INCORRECTLY APPLIED FUNDAMENTAL PRINCIPLES THAT GOVERN THE FIDUCIARY DUTIES OF CONSERVATORS ......................5
A. The Dual Roles Of A Conservator in Probate Law......................................7
1. A Conservator Has A Duty to Conserve The Conservatee’s Autonomy .........................................................................................................................7
2. A Conservator, As A Fiduciary, Owes The Conservatee The Duty of Loyalty And The Duty To Prudently Conserve The Conservatee’s Estate .............................................................................................................1 1
B.
The Companies As Their Conservator...............................................................13
The Net Worth Sweep Amendment Violates Duties The FHFA Owes To
1. A Conservator Breaches The Duty To Rehabilitate The Conservatee By Acting To Wind Down The Conservatee’s Assets...........................14
2. A Conservator Breaches The Duty Of Loyalty By Providing A Windfall To A Third Party To The Detriment Of The Conservatee ...16
3. A Conservator Breaches The Duty To Prudently Conserve The Estate By Acting To Wind Down The Conservatee’s Assets When The Conservatee Has Achieved Financial Stability ......................................20
Sorry, I was looking at Isaac's brief. Here's the table of contents to give you an idea. It's 63 pages. :)
ARGUMENT ...................................................................................................10
I. The District Court Erred in Finding that FHFA Was Acting as a Conservator............................................................................................. 10
II. Due Process Requires that Shareholders in a Conservatorship be
Provided with an Avenue for Relief ......................................................... 17
III. Corporate Stakeholders Retain Rights in a Conservatorship Which
Cannot Be Less Than What They Would Have in a Receivership .............. 21
IV. The District Court’s Decision Will Seriously Unsettle Expectations
for Investors in Financial Institutions and Housing-Related Securities
and Produce Significant Economic Dislocations .......................................24
One more just added
07/06/2015 NOTICE filed [1561139] by Investors Unite of intention to participate as amicus curiae. [Disclosure Listing: Not Attached] [Service Date: 07/06/2015 ] [14-5243] (Krimminger, Michael)
Yes, 2 out of four of the mentioned special advisors to Watt, worked for the Treasury for multiple years.
yes, today
From Perry Capital Appeal
07/06/2015 NOTICE filed [1561083] by 60 Plus Association, Inc. of intention to participate as amicus curiae. [Disclosure Listing: Attached] [Service Date: 07/06/2015 ] [14-5243, 14-5254, 14-5260, 14-5262] (Ganzfried, Jerrold)
07/06/2015 NOTICE filed [1561091] by Center for Individual Freedom of intention to participate as amicus curiae. [Disclosure Listing: Not Attached] [Service Date: 07/06/2015 ] [14-5243, 14-5254, 14-5260, 14-5262] (Steele, Myron)
07/06/2015 AMICUS FOR APPELLANT BRIEF [1561097] filed by [Service Date: 07/06/2015 ] Length of Brief: 5,363 words using Microsoft Word 2007 Professional. [14-5243, 14-5254, 14-5260, 14-5262] (Steele, Myron)
07/06/2015 AMICUS FOR APPELLANT FINAL BRIEF [1561107] filed by Association of Mortgage Investors, Mr. Robert H. Hartheimer, Independent Community Bankers of America and Mr. William M. Isaac in 14-5243 [Service Date: 07/06/2015 ] Length of Brief: 6,995. [14-5243, 14-5254, 14-5260, 14-5262] (Rhatigan, Robert)
07/06/2015 AMICUS FOR APPELLANT BRIEF [1561114] filed by [Service Date: 07/06/2015 ] [14-5243, 14-5254, 14-5260, 14-5262] (Ganzfried, Jerrold)
07/06/2015 MOTION filed [1561117] by National Black Chamber of Commerce to participate as amicus curiae. [Disclosure Listing: Attached] [Service Date: 07/06/2015 ] [14-5243, 14-5254, 14-5260, 14-5262] (Bergeron, Pierre)
07/06/2015 AMICUS FOR APPELLANT BRIEF [1561124] filed by [Service Date: 07/06/2015 ] Length of Brief: 2,215 words. [14-5243, 14-5254, 14-5260, 14-5262] (Bergeron, Pierre)
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1/10/2014
Federal Housing Finance Agency Director Mel Watt Announces Four Staff Appointments
Washington, D.C. – Mel Watt, who was sworn in on January 6, 2014 as Director of the Federal Housing Finance Agency, today announced the appointment of four special advisors—Megan Moore, Bob Ryan, Eric Stein and Mario Ugoletti—to provide counsel on policy and strategic decisions at the FHFA.
Megan Moore will join the FHFA as Special Advisor – Intergovernmental. Moore has worked at the U.S. Department of the Treasury since June 2009, most recently as Deputy Assistant Secretary for Housing, Small Business and TARP in the Office of Legislative Affairs. Moore also worked in the U.S. House of Representatives from 2006 to 2009. Moore holds a Master’s degree in Public Administration from Baruch College at City University of New York and a Bachelor’s degree from Howard University. Moore will join the FHFA later in January.
Bob Ryan will join the FHFA as Special Advisor – Industry. Ryan most recently served as a Senior Vice President of capital markets at Wells Fargo Home Mortgage. From 2009 to 2012 he was a Senior Advisor to U.S. Department of Housing and Urban Development Secretary Shaun Donovan and served as the first chief risk officer at the Federal Housing Administration. Ryan also spent 26 years at Freddie Mac. Ryan earned a B.S. in Business from George Mason University. He will also join the FHFA later in January.
Eric Stein will serve initially as Special Advisor and Acting Chief of Staff and later will become Special Advisor – Consumer. He previously worked at Self-Help and the Center for Responsible Lending for 17 years, most recently as Senior Vice President. Stein also served at the Treasury Department as Deputy Assistant Secretary for Consumer Protection from 2009 to 2010. Stein holds a law degree from Yale University and a B.A. from Williams College. Stein joined the FHFA on January 7.
Mario Ugoletti has served as a Special Advisor to the Acting Director of the FHFA since 2009 and has been appointed by Mr. Watt as Special Advisor – Agency. Prior to joining the FHFA, Ugoletti spent 14 years at the Treasury Department and served as Director of the Office of Financial Institutions Policy from 2004 to 2009. Ugoletti has a Ph.D. in Economics from Penn State University.
“I am very pleased that Megan, Bob, Eric and Mario have agreed to be part of the FHFA team and to provide solid advice and perspective on the important issues I will be facing as Director of the Agency. Along with the strong staff already in place, these advisors have diverse skills and experience in housing finance policy that will help me build a stronger foundation for our nation’s housing finance system,” said Watt.
###
The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. These government-sponsored enterprises provide more than $5.5 trillion in funding for the U.S. mortgage markets and financial institutions.
Contacts: ?Stefanie Johnson (202) 649-3030 / Corinne Russell (202) 649-3032
Hint... (referring to my last post) owner of largest maker of manufactured housing, also has had, and continues to have, a large stake in Wells Fargo. Their whole operation would not be as seamless without Fannie and Freddie!!!
Hmm..and who is owner of the largest maker of manufactured housing?
Wells Fargo's Mortgage Business Is Getting Even Bigger
Wells Fargo has a dominant share of the manufactured home community lending market, and there is more room to grow.
Matthew Frankel
Jul 6, 2015 at 1:14PM
Wells Fargo Photostream
Wells Fargo (NYSE:WFC) is already the biggest player in the U.S. mortgage market, but the company seems to have even greater ambitions. The company is actively expanding its commercial real-estate lending operation, with specific emphasis being placed on manufactured home community (MHC) financing.
Here's why the company is allocating more resources to this specialized form of commercial real estate, and what it could mean for the bank and its shareholders.
Wells Fargo's dominant MHC market share
After acquiring a $9 billion commercial loan portfolio from General Electric in April, Wells Fargo has more than $13 billion of MHC loans in its portfolio, a dominant market share. In fact, the No. 2 lender has less than one-fourth of this amount.
Including the GE acquisition, Wells Fargo has about $140 billion in commercial real estate (CRE) loans in its portfolio -- the leading share, but still just 8% of the total. So it's fair to say there's still room to grow.
In order to run the MHC lending business, Wells brought in two veterans from GE Capital, which indicates it plans to commit substantial resources to the continued expansion of its dominant position.
Why manufactured home communities?
Wells Fargo offers MHC financing via Fannie Mae DUS (delegated underwriting and servicing) programs. In other words, these loans are eligible for a government guarantee, similar to residential mortgages.
Typically, a MHC loan is for at least $2 million and comes with a three-year to 10-year loan term, amortized over 25 to 30 years. A loan-to-value ratio of 80% is required, but 75% is more common, and borrowers are charged fixed interest rates, which are based on current Treasury yields.
The properties MHC loans are backed by must meet some strict criteria, including (but not limited to):
50% of home sites must be able to accommodate double-wide homes.
The property must offer market-competitive amenities.
85% of home sites must be occupied.
The majority of the property cannot be located in a flood zone.
The property must bring in more than enough money to service the debt.
The point of this discussion is that all of these factors make MHC lending very safe. In fact, Fannie Mae has no MHC loans in default or foreclosure, an extremely impressive statistic, considering that there are more than $34 billion in outstanding MHC loans.
Wells Fargo's historical focus on growing while keeping charge-off and default rates low, is why the company is so interested in expanding this part of its business. Further, Wells Fargo believes there's a lot of unmet demand for this type of financing, which makes it a great way for the bank to expand its CRE lending business in the tough low-interest environment.
It could mean more money for Wells
Wells Fargo's CEO called the company's acquisition of the commercial loans from GE a "once-in-a-generation event," so it's fair to say the company got a good deal, and it feels it can capitalize on its now-dominant MHC market share.
Wells Fargo's mortgage business is rather lucrative for the company, so further expansion could mean a nice boost to the bottom line. In addition to the interest income from its vast portfolio of mortgages, the company benefits from servicing fees, as well as origination fees for all of the mortgage loans it makes -- which, as I've said before, can be quite a lot of money.
Between the expansion of commercial real estate and the thriving residential mortgage market, Wells Fargo shareholders could see a greater-than-expected rise in earnings over the coming years. Not that shareholders needed it, but this is yet another reason to be optimistic about Wells Fargo's bright future.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of General Electric Company and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
KylieM, more updates after tomorrow's conference, (closed to public.) As TII just posted, (thanks TII) Interesting items continue to surface!
(certain instructions not to answer, ha!)
This Court scheduled a status conference for July 7, 2015 at 1 p.m. Doc. 174 (June 29, 2014) ("June 29 Order"). The parties hereby notify the Court that they expect to discuss the following topics at the July 7 status conference: (1) the current status of the discovery authorized by the Court; (2) the current discovery schedule and the need for an additional extension of the discovery deadline; and (3) the timing of motions to remove the "Protected Information" designation from materials produced during discovery. In addition, Plaintiffs propose to discuss two additional topics: (4) the need for guidance from the Court regarding certain issues that have arisen during depositions, and are likely to arise at future depositions, including, for example, the propriety of certain instructions not to answer; and (5) Plaintiffs’ pending motion to stay briefing on the Government’s supplemental motion to dismiss.
The parties hereby notify the Court that the following attorneys for the Fairholme Plaintiffs plan to appear in person at the status conference:
? Charles J. Cooper, Cooper & Kirk, PLLC
? David H. Thompson, Cooper & Kirk, PLLC
? Vincent J. Colatriano, Cooper & Kirk, PLLC
Case 1:13-cv-00465-MMS Document 180 Filed 07/06/15 Page 1 of 2
The following attorneys for the United States plan to appear in person:
? Kenneth M. Dintzer
? Elizabeth M. Hosford
? Gregg M. Schwind
Consistent with the June 29 Order, all attorneys who will appear for the parties have been admitted to the Protective Order in this case. Because the Court directed that the July 7 status conference shall be closed to the public, counsel for the parties in this case has not made arrangements for attorneys for the plaintiffs in related cases to listen to the status conference via telephone. The Government requests that a telephone line be made available for Katherine Brandes, counsel from the Department of the Treasury, to listen to the status conference.
Date: July 6, 2015 Respectfully submitted, BENJAMIN C. MIZER
Principal Deputy Assistant Attorney General
s/ Robert E. Kirschman, Jr.
ROBERT E. KIRSCHMAN, JR.
Director
s/ Kenneth M. Dintzer
KENNETH M. DINTZER
Deputy Director
Commercial Litigation Branch
U.S. Department of Justice
P.O. Box 480 Ben Franklin Station
Washington, D.C. 20044
(202) 616-0385
(202) 307-0972 fax
KDintzer@CIV.USDOJ.GOV
Attorneys for Defendant
s/ Charles J. Cooper
Charles J. Cooper
Counsel of Record for Plaintiffs
COOPER & KIRK, PLLC
1523 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 220-9600
(202) 220-9601 (fax)
ccooper@cooperkirk.com
Of counsel:
Vincent J. Colatriano
David H. Thompson
Peter A. Patterson
Brian W. Barnes
COOPER & KIRK, PLLC
1523 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 220-9600
(202) 220-9601 (fax)
NuGene kathy ireland® Conducts Meetings with World's Most Prestigious Beauty Editors in New York City
Allure, Vogue, Glamour, Marie Claire, Self, Shape, More, Town and County, People, Cosmopolitan, Better Homes and Gardens and W. are Examples of the Glamour Publications
IRVINE, Calif., July 6, 2015 /PRNewswire/ -- NuGene International, Inc. ("NuGene") (NUGN), a developer, manufacturer and marketer of advanced skin and hair care lines utilizing adipose derived human stem cells and stem cell media, conducted one-on-one meetings with top beauty editors in New York City including Allure, Vogue, Glamour, Marie Claire, Self, Shape, More, Town and Country, People, People Style Watch, Cosmopolitan, Better Homes and Gardens, W.
NuGene kathy ireland® was introduced by Janine Coppola, Sr., Director of Brand Marketing at NuGene, who gave an overview of the skin and hair care product lines, formula innovations, and points of distribution. She then introduced Dr. Dendy Engelman, NuGene Advisory Board member and New York City dermatologist who explained the science behind the NuGene brand.
Dr. Engelman explained that NuGene's stem cells are derived from adipose (fatty) tissue of healthy donors. The adipose derived stem cells have the highest concentration of growth factors versus other types of stem cells and are extremely effective at reducing signs of aging and improving luminosity of the skin. She then focused on NuGene's hero products and showed the results of a 12 week split face study using before and after photos. Each subject showed clear visual changes in reduction of hyperpigmentation and reduction of wrinkles.
About NuGene International, Inc.
NuGene International, Inc. specializes in developing, manufacturing and marketing proprietary regenerative cosmeceutical and pharmaceutical products based on adipose derived human stem cell and human stem cell media. The US Department of Health and Human Services calls regenerative medicine the "next evolution of medical treatments." The regenerative medical market which includes cosmeceuticals and pharmaceuticals was estimated at $7.2 Billion in the US in 2014 and is expected to rapidly grow in the coming years according to RNCOS Business Consultancy Services Global Cosmeceuticals Market report. NuGene's cosmeceutical and pharmaceutical products are based on proprietary stem cell based regenerative formulations derived from non-controversial, adult human stem cell derived media obtained from adipose tissue. NuGene's exclusive products combine its in-house advancements, proprietary technologies, and patent pending formulations. NuGene's goal is to leverage its knowledge and expertise to develop age defying cosmeceutical skincare and hair care products in addition to pharmaceutical products based on the same regenerative science platform.
Forward-Looking Statements
This release contains forward-looking statements. Actual results may differ from those projected due to a number of risks and uncertainties, including, but not limited to the possibility that some or all of the matters and transactions considered by NuGene International may not proceed as contemplated, and by all other matters and assumptions specified in NuGene's filings with the Securities and Exchange Commission, especially those risks and other matters described under "Risk Factors" within NuGene's Form 10-Q filed with the Commission on May 15, 2015. These statements are made based upon current expectations that are subject to risk and uncertainty. NuGene does not undertake to update forward-looking statements in this news release to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information.
http://finance.yahoo.com/news/nugene-kathy-ireland-conducts-meetings-123000671.html?.tsrc=applewf
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$$$NUGN$$$
Ya, It wasn't CFO, but it was another in the Southern California desert area in the last year.
Hopefully we get a good audit now that all the accounting firms are in.
Happy 4th of July to you too, JJ8. Thank you! I come from a long line of engineers. I maybe should have taken that route! I think you're right. It seems like NUGN will continue this gradual upward trend.