Replies to post #175868 on Fannie Mae-No Politics (FNMA)

[obiterdictum]

It appears that the Treasury/FHFA are, for a lack of a better term...saying they are above the law and do/should not have to allow for discovery.

Actually, the writer of the article suggested that the US Treasury should not allow discovery, not the US Treasury. I questioned that that that would not be possible if the court handed them a discovery order. If there was a refusal to comply with a court ordered discovery, the defendants would be held in contempt of court (see contents of Rule 37(b) of both the Federal Rules Of Civil Procedure For The United States District Courts and Current Rules of the Court of Federal Claims.)

1. Who appointed FHFA conservator over fannie and freddie?

James B Lockhart III, Director of the FHFA in 2008.

2. Why would FHFA willingly agree to the 3rd amendment sweep knowing full well their responsibility as conservator would be in direct conflict with their fiduciary responsibility, and responsibilities of a conservator.

That answer must be given by the FHFA and will be found in discovery and after. Partial reasoning is provided in their argument and Plaintiffs counterarguments below. However, the Plaintiffs take a different view.

3. Can FHFA be...and NOT be a federal agency serving in various capacities?

Yes. The court may or may not rule in that manner. It will be determined in court in what role and capacity the FHFA acted in relation to the Third Amendment to the PSPAs.

The FHFA is indeed an independent federal agency and part of the Federal Government. However, the FHFA is trying to escape the Plaintiffs claim of proper court jurisdiction by arguing that the FHFA is not the United States [Government] for the purposes of the US Court of Federal Claims jurisdiction. In other words, the Plaintiffs are in the wrong court.

Here is the type of argument being made in this regard in the Court of Federal Claims by Washington Federal.

2. FHFA Is Not The United States For Purposes Of The Tucker Act

When Acting As Conservator For Fannie Mae And Freddie Mac
The Court should dismiss the complaint as it relates to FHFA’s actions because courts
have ruled that a Government regulatory agency – acting as conservator – is not the United
States. In addressing the question of whether FHFA is a Federal actor because it placed the
Enterprises into conservatorship in 2008, the District Court for the District of Columbia recently
held that “FHFA as conservator of Fannie Mae is not a government actor.” Herron v. Fannie
Mae, 857 F. Supp. 2d 87, 96 (D.D.C. 2012). Other courts have reached the same conclusion in
the context of the Federal Deposit Insurance Corporation (FDIC) acting as conservator or
receiver of banks. See O’Melveny & Myers v. Fed. Deposit Ins. Corp., 512 U.S. 79, 85 (1994)
(FDIC acting as receiver “is not the United States”); Ameristar Fin. Servicing Co. LLC v. United
States, 75 Fed. Cl. 807, 812 (2007) (dismissing claim because the FDIC as conservator “was not
acting as the United States”)

Here, FHFA, as conservator, stands in the shoes of the Enterprises. Plaintiffs’ claims
against FHFA and its actions as conservator are effectively claims against Fannie Mae and
Freddie Mac – neither of which are Government entities. This Court has jurisdiction only “to
hear cases in which a plaintiff seeks just compensation for a taking under the Fifth Amendment
as such a claim is ‘against the United States founded . . . upon the Constitution.’” Souders v.
S.C. Pub. Serv. Auth., 497 F.3d 1303, 1307-08 (Fed. Cir. 2007). Indeed, the Fifth Amendment
applies solely to Government action. See Alves v. United States, 133 F.3d 1454, 1458 (Fed. Cir.
1998); 767 Third Ave. Assocs. v. United States, 48 F.3d 1575, 1580 (Fed. Cir. 1995).

Accordingly, plaintiffs’ challenge to FHFA’s actions as conservator must fail. By suing the
conservatorships, plaintiffs – shareholders in the Enterprises – are effectively suing their own
corporations; certainly this Court and the United States have no role in this intramural scrum.

Source: https://nebula.wsimg.com/f386cd7fe6099da7e2451ab6a709d110?AccessKeyId=B118A02567BAB790CC96&disposition=0

The same argument is used in Fairholme vs USA as that used in Washington Federal vs USA. Both cases are in the Court of Federal Claims.

See Pages 13 and 14 in http://online.wsj.com/public/resources/documents/121013govmotion.pdf

Here is Fairholme's reponse to that argument.

2. Plaintiffs Are Entitled to Discovery To Refute the Government’s Argument
that This Court Lacks Jurisdiction over FHFA.

The Government also argues in its motion to dismiss that this Court lacks jurisdiction
over FHFA because FHFA is not “the United States” for purposes of the Tucker Act, 28 U.S.C. §
1491. Motion to Dismiss at 13. Whether FHFA is “the United States” or a private party not
covered by the Tucker Act demands a highly context-specific inquiry that considers in part the
purposes of FHFA’s actions. See Slattery v. United States (Slattery I), 583 F.3d 800, 827 (Fed.
Cir. 2009), reinstated after reh’g en banc, 635 F.3d 1298 (2011) (en banc); Auction Co. of
America v. FDIC, 132 F.3d 746, 750 n.1 (D.C. Cir. 1997); see also Lebron v. National R.R.
Passenger Corp., 513 U.S. 374, 392 (1995) (the same entity may be treated as the United States
for certain purposes but not for others).

In support of its argument that FHFA is not the United States, the Government makes
factual assertions that contradict the allegations of Plaintiffs’ complaint.

a. First, the Government asserts that FHFA entered into the Third Amendment because
the Companies failed to generate enough revenue to fund their 10 percent dividend obligation to
Treasury. Motion to Dismiss at 9. Specifically, the Government represents to the Court that the
Enterprises “found themselves in a death spiral: drawing on the Treasury commitment to pay
Treasury its fixed dividend, which, in turn, increased Treasury’s total investment and the next
quarterly dividend.” Id. at 9-10. In short, the Government frames its decision to unburden the
Enterprises of untold billions of dollars of profits in excess of its dividend obligation to Treasury
as an act of generosity, designed to save these institutions from their healthy balance sheets. The
Government’s support for this assertion includes an August 2012 press release from FHFA that
Plaintiffs do not cite, quote, or reference in their complaint. See id. at 10 n.9 (citing Press
Release, FHFA, Statement of FHFA Acting Director Edward J. DeMarco on Changes to Fannie
Mae and Freddie Mac Preferred Stock Purchase Agreements (Aug. 17, 2012)). See also Motion
to Dismiss at 10 (asserting without citation that the Third Amendment “was designed to
strengthen the Enterprises, decreasing their funding costs and avoiding draws on the limited
backstop provided by Treasury in the Stock Agreements”).

The Government’s factual claims once again flatly contradict both the allegations in
Plaintiffs’ complaint and the Government’s own prior public statements. Plaintiffs allege that
FHFA and Treasury entered into the Third Amendment not to save the Enterprises but instead to
harvest their record-setting profits for the benefit of the Federal Government’s urgent deficit
reduction efforts. Compl. ¶¶ 62-75; see id. ¶ 64 (quoting a Treasury press release stating that the
purpose of the Third Amendment is to “expedite the wind down of Fannie Mae and Freddie Mac”
and “make sure that every dollar of earnings each firm generates is used to benefit
taxpayers”). Along these lines, Plaintiffs also allege that the Government took all the profits of
the Companies not during a downturn but at the very moment when they were “experiencing a
turnaround in their profitability” and the Government could “expect [them] to remain profitable
for the foreseeable future.” Id. ¶¶ 55, 57. The Government’s assertion that the Companies
benefited from the Net Worth Sweep effected by the Third Amendment also contradicts the
allegation in the complaint that “[t]he Companies received no investment by Treasury or other
meaningful value in return for the Net Worth Sweep.” Id. ¶ 11 (emphasis added).3

The dispute over the purpose of the Third Amendment is relevant to the fact-bound
inquiry of whether FHFA acted as conservator of the Enterprises. Plaintiffs allege that FHFA
and Treasury acted not to benefit the Enterprises but instead to seize their record-setting profits
to benefit the Federal Government. If the Plaintiffs are correct, then FHFA’s actions must be
attributed to the United States, even if FHFA formally acted in its capacity as conservator. See
Lebron, 513 U.S. at 397 (the United States may not “evade the most solemn obligations imposed
in the Constitution by simply resorting to the corporate form”). The Government’s motion
contradicts Plaintiffs’ factual allegations.
________________________________________________
3 Plaintiffs’ allegations that the Government entered into the Net Worth Sweep to benefit
taxpayers rather than the Companies is also supported by a document made part of the
Administrative Record that the Government recently filed in a parallel case in the District Court
for the District of Columbia Circuit. See Fairholme Funds, Inc. et al. v. Federal Housing
Finance Agency, et al., No. 13-cv-1053 (D.D.C.), Administrative Record of the Department of
the Treasury, Doc. No. 23-1, at T3902 (Treasury’s Capital Support for The GSEs: Summary
Review and Key Considerations (PowerPoint) (Aug. 8, 2012)) (stating that the Net Worth Sweep
will place “[t]axpayers [ ] in a stronger position as all future net income from the GSEs will be
paid directly to Treasury”); see also id. at T201 (Memo from J. Goldstein, Under Secretary for
Domestic Finance, to T. Geithner, Secretary of Treasury (Dec. 20, 2010)) (acknowledging “the
Administration’s commitment to ensure existing common equity holders will not have access to
any positive earnings from the GSEs in the future”).
__________________________________________________

Discovery is likely to disclose information highly relevant to the disputed question of
why the Government entered into the Third Amendment. The Government is certain to be in
possession of evidence – e-mails and other communications and documents – regarding the
decision to enter into the Third Amendment. This evidence also includes depositions of officials
involved in the decision to enter into the Third Amendment. Plaintiffs should be afforded the
opportunity to serve interrogatories, take depositions, and request the production of those
documents relevant to the genuine purpose of the Government in entering into the Third
Amendment. This information is solely in the hands of the Government; it is not otherwise
publicly available.

b. Second, the Government asserts that FHFA acted independently in entering into the
Net Worth Sweep with Treasury, and that Treasury did not coerce or otherwise influence its
decision to do so. The Government asserts as fact that “it was FHFA’s decision to enter into the
funding agreement on behalf of the Enterprises,” Motion to Dismiss at 4, and that the Third
Amendment was a “voluntary agreement” between Treasury and FHFA, id. at 13, 15. The
Government tells this Court that “Treasury, alone, could not and did not take anything from the
plaintiffs, unilaterally or otherwise.” Id. at 15 (emphasis added).

The Government’s factual assertions contradict the allegations in Plaintiffs’ complaint
that Treasury was a driving force behind the Net Worth Sweep effected by the Third
Amendment. See, e.g., Compl. ¶ 10 (“But Treasury was not content with its entitlement to
79.9% of the profits of the Companies going forward . . . . It wanted to cut out the preferred
shareholders entirely, and it wanted all of the profits.” (emphasis added).); id. ¶ 63 (“On August
17, 2012, Treasury announced that the Federal Government had made a new deal with itself that
expropriated the property interests of the Companies’ preferred shareholders, such as
Plaintiff Fairholme and the Berkley plaintiffs.”). The Complaint alleges that the Net Worth Sweep was
something directed by the United States and Treasury to benefit the United States. Id. ¶ 72 (“Nor
can the Government achieve the same result . . . by having one of its agencies – Treasury –
negotiate a new contract with another of its agencies – FHFA – that expropriates the value of the
Preferred Stock in Fannie and Freddie.”). The Government’s claim that FHFA, acting as
conservator of the Companies, desired the Net Worth Sweep is also inconsistent with Plaintiffs’
allegation that FHFA secured no benefit whatsoever for Fannie and Freddie from the Net Worth
Sweep. Id. ¶ 11 (“The Companies received no investment by Treasury or other meaningful value
in return for the Net Worth Sweep.”). The Government’s factual assertion is also contradicted
by a document made part of the Administrative Record that was recently filed in a parallel case
in the District Court for the District of Columbia and that suggests that Treasury was a driving
force behind an earlier major amendment to the Purchase Agreements. See Fairholme Funds,
Inc. et al. v. Federal Housing Finance Agency, et al., No. 13-cv-1053 (D.D.C.), Administrative
Record of the Department of the Treasury, Doc. No. 23-1, at T3901 (Treasury’s Capital Support
for The GSEs: Summary Review and Key Considerations (PowerPoint) (Aug. 8, 2012))
(discussing the Net Worth Sweep as Treasury’s “proposed solution” to the Companies’ dividend
requirements). At a minimum, the Government’s assertion that FHFA made an independent and
unilateral decision to grant the Net Worth Sweep to Treasury goes well beyond the factual
allegations of Plaintiffs’ complaint.

The factual dispute over whether FHFA “voluntarily” and independently entered into the
Net Worth Sweep is relevant to the Government’s argument that this Court lacks jurisdiction
over FHFA. Whether FHFA acted as the United States or in a private capacity will turn on a
context-specific inquiry that will include consideration of whether FHFA acted at the
direction and behest of the Treasury Department. If, as Plaintiffs allege, FHFA was simply
an agent and arm of Treasury, then this Court certainly has jurisdiction over FHFA.

Discovery is likely to reveal evidence highly relevant to the Government’s case, such as
communications and documents of FHFA, Treasury, and other Government agencies that
concern the agencies’ analyses of the financial and other considerations implicated by entering
into the Net Worth Sweep. Discovery should include production of all Government documents
related to whether Treasury or other Government agencies influenced the decision of FHFA to
enter into the Third Amendment. Interrogatories, depositions, and document production are
likely to generate evidence that will rebut the Government’s factual claims and reveal that
Treasury or other Government agencies played a direct causal role in FHFA’s decision to agree
to the Net Worth Sweep. This information is solely in the hands of the Government and is not
otherwise publicly available.

Source: http://www.valueplays.net/wp-content/uploads/Fairx-discovery-motion.pdf

Will the FHFA's argument hold up under the scrutiny of the Sweeney Court and win over the FHFA and US Treasury?

Time will tell.