My Fannie Valentine - The Seila Sequel
Mar. 6, 2020 3:52 PM ET |
..... Summary .....
--- Seila Law vs. CFPB was heard by SCOTUS on March 3. Focus was on the unconstitutionality of the single Director removal clause, which is also at stake for FHFA.
--- CFPB's removal clause stipulates "inefficiency, neglect of duty or malfeasance in office."
--- FHFA's removal clause, HERA Sec. 1312 (b) (2), only stipulates "for cause."
--- While Frank-Dodd, CFPB's Father, includes a severability clause, i.e. the Act remains valid even if one Section is not, HERA, FHFA's Mother, does not. Hence the likely consequences below.
Don't ask me why Frank-Dodd is a Father, and HERA a Mother. Let's stick to gender-neutral. But ask me about severability clauses. This means an Act can stand even if part of it is stricken as unconstitutional. Very important here.
First off, what does the CFPB have to do with the GSEs, which is our main subject? Well, this particular court case. Both agencies, CFPB and FHFA, have one single Director, who is very difficult to fire by the President, a violation of Executive Power. This article by Amy Howe on SCOTUSblog.com will help you understand, and many of my comments are derived from it.
Obviously, if SCOTUS rules that CFPB is unconstitutionally structured because of the current Director removal clause, this will set precedent for FHFA, among others "independent" agencies, to include Social Security Administration, the Office of Special Counsel, the Fed... The remedy will differ in all cases, but let's stay with the basics - is this clause unconstitutional?
Let's see what the Justices had to say in Seila, and let's try to anticipate what will happen when SCOTUS hears Collins. In that case, Collins' December 2019 brief reply is clear (p.4):
If the Court concludes in Seila Law that the CFPB-and, by necessary implication, FHFA-are unconstitutionally structured, the legal status of everything these agencies have ever done will be cast into doubt. [...]
Thus, while Defendants raise questions that are idiosyncratic to the Net Worth Sweep litigation, Plaintiffs ask the Court to decide issues with broader significance." [emphasis added]
In reading Amy's account, which I found excellent, it seems that Justices agreed on the unconstitutionality, except for Sotomayor and Ginsburg who went "next." Then, the debate was on the remedy. I paraphrase, "Can we find a way to keep the CFPB alive while striking down the "inefficiency, neglect of duty or malfeasance in office?"
That's going to be a tough half-pregnant one, but it should be solved by the severability clause of Frank-Dodd. They will strike down the clause and keep CFPB running.
In the case of FHFA when it comes to the Director's removal, only two words though, "for cause." (HERA, Sec. 1312, (b) (2)).
In Seila, Ginsburg argued that "inefficiency, etc." was a "very modest constraint." Roberts, at first, try to interpret the word as well, saying that it looked more like "at will" than "for cause," only to have second thoughts.
In FHFA, there is no such ambiguity. The wording is "for cause," and based on Seila's hearings, the outcome seems pretty straightforward to me.
Unconstitutional structure, no severability; therefore, the whole FHFA needs to be stricken down. This is what Collins means by "issues with broader significance."
Interestingly, Collins also noticed this (p.9, C.2):
Defendants next criticize Plaintiffs for requesting that the Third Amendment be set aside without challenging the earlier investment agreements that FHFA signed with Treasury on behalf of the Companies. Defendants made this argument for the first time in their panel appellate briefs, and ever since Plaintiffs have consistently said that the agreements ought to be invalidated in their entirety to the extent that the courts deem that broader remedy to be more appropriate.
It seems Treasury just woke up to the growing possibility of a big bill out there... This is actually the main difference between CFPB and FHFA.
In CFPB's case, one can argue that it acted in the best interest of the community. In the case of FHFA, however, we all know Treasury acted improperly and, as revealed by the now unsealed correspondence, nefariously, to include the confiscatory 10% dividend as well as the Net Worth Sweep.
No need to expand here more than we have already, but that's a fact SCOTUS will surely take into consideration, much like it does in Seila. Go FnF!
Disclosure: I am/we are long FNMA, FNMAT, S, VECO, HL, PHM, CDNA, AGM, EA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: FNMA, FMCC and related securities do not trade on major exchanges and are not marginable.
