"Collins Cheat Sheet
Two things to look for in the SCOTUS opinion
Rule of Law Guy
May 3
What should you look for in the SCOTUS Collins majority opinion? I offer two important questions that GSE investors should be particularly interested to see how SCOTUS answers.
Is the Net Worth Sweep inimical to the Conservator’s duties?
SCOTUS and the federal Circuit Courts are reviewing courts…they review the decision below, and decide whether to vacate, modify or affirm the decision below. The decision below in Collins, by the 5th Circuit Court of Appeals en banc, itself reversed the federal District Court judgment that granted the United States motion to dismiss the plaintiffs’ APA claim that the NWS was ultra vires, or not within the power of the FHFA as conservator to adopt.
So, whereas the federal District Court held that the Collins plaintiffs could show no facts which would prove that the NWS was outside the Conservator’s powers, the 5th Circuit held that the Collins plaintiffs had made a “plausible showing” (the minimum necessary to defeat the United States’ motion to dismiss) that the NWS was outside the Conservator’s powers, and therefore void. So the District Court was wrong to dismiss the action, and should schedule the case for trial on remand.
What was the difference between the federal District Court’s and 5th Circuit’s analyses? The District Court bought the United States argument that the Conservator could do anything so long as what the Conservator did could be construed as managing the affairs of the GSEs. The 5th Circuit rejected this analysis and concluded that the Conservator had a duty to conserve and preserve the assets of the GSEs, and do such things as may rehabilitate the GSEs back to safety and soundness.
Therefore, the 5th Circuit held that the Collins plaintiffs should have the opportunity to go back to the District court to argue that, based upon its evidence and applying the proper legal standard as set forth by the 5th Circuit, the NWS was ultra vires and therefore void.
I expect SCOTUS, at a minimum, will affirm the 5th Circuit decision, setting forth what it considers to be the correct legal standard relating to the Conservator’s duty for the District Court to adopt upon remand. Presumably if SCOTUS affirms the 5th Circuit, then SCOTUS’s analytical framework should resemble that of the 5th Circuit. The net result will be a remand to the District Court for a trial. The Collins plaintiffs may be able to short circuit the need for a full trial by moving for summary judgment at the District Court, as I discuss in a prior post, which the District Court could grant more quickly than a judgment after trial.
But will SCOTUS go further than the 5th Circuit, to the benefit of the Collins plaintiffs? Consider these questions:
Is there any set of facts under which the NWS could be fairly construed to further the Conservator’s rehabilitative mission? The stated purpose of the NWS is to drain off all of the GSEs’ capital for the benefit of the Treasury, leaving the GSEs with no capital to insulate them from losses arising from their trillions of dollars of guaranty obligations. The foremost indicium of safety and soundness for financial institutions such as the GSEs is a robust capital position. How does reducing the GSEs’ capital to zero promote safety and soundness, which the 5th Circuit found to be the Conservator’s duty?"
