Tag Archives: Macey

Carney, Epstein, Macey & Reiss on GSE Litigation

Posted on by

I was on an interesting panel today on the state of the Fannie/Freddie shareholder litigation. Judge Lamberth’s ruling in Perry Capital LLC v. Lew et al. was bad news for the plaintiffs in all of the shareholder suits. The panel was hosted by Michael Kim, CRT Capital Managing Director & Senior Research Analyst, and featured

  • John Carney – Wall Street Journal
  • Richard Epstein – NYU Law School
  • Jonathan Macey – Yale Law School
  • David Reiss – Brooklyn Law School

The agenda for the panel included

  • an overview of the litigation timeline for the cases in Iowa District Court, the Court of Federal Claims and the U.S. Court of Appeals for the District of Columbia
  • a detailed analysis of Judge Lamberth’s Ruling and
  • a review of legal strategies and the outlook going forward

The more of these panels I am on, the more I am struck by the passionate intensity of those representing the shareholders. They are convinced that they are not only right, but also that the judiciary will see it their way. I lack this conviction.

It is not that I am so sure that the shareholders will ultimately lose (although that is a good possibility). Rather, it is that the facts and the law are extraordinarily complex in these cases. Because of this complexity, I find it hard to predict how the judges assigned to hear these cases will choose to frame them.

Judge Lamberth and other judges deciding cases arising from government action during the financial crisis often frame their decisions with a narrative of extraordinary government intervention during a period of great uncertainty. As a result, those judges have granted the government as much deference as they can.

Many of the shareholder advocates analogize from precedents drawn from more pedestrian situations and believe that courts will hew closely to them. I am quite skeptical of that approach. Judges lived through the crisis too and are all too aware of the precipice we were on. I think they will think twice before second guessing those who had to call the shots with such severely limited information, and did so while under unrelenting pressure to get it right when the stakes were so high.

The Government Takeover of Fannie and Freddie

Posted on by

Richard Epstein has posted a draft of The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards. The paper addresses “the various claims of the private shareholders, both preferred and common, of Fannie and Freddie.” (2) He notes that those claims have

now given rise to seventeen separate lawsuits against the Government, most of which deal with the Government’s actions in August, 2012. One suit also calls into question the earlier Government actions to stabilize the home mortgage market between July and September 2008, challenging the constitutionality of the decision to cast Fannie and Freddie into conservatorship in September 2008, which committed the Government to operating the companies until they became stabilized. What these suits have in common is that they probe, in overlapping ways, the extent to which the United States shed any alleged obligations owed to the junior preferred and common shareholders of both Fannie and Freddie. At present, the United States has submitted a motion to dismiss in the Washington Federal case that gives some clear indication as to the tack that it will take in seeking to derail all of these lawsuits regardless of the particular legal theory on which they arise. Indeed, the brief goes so far to say that not a single one of the plaintiffs is entitled to recover anything in these cases, be it on their individual or derivative claims, in light of the extensive powers that HERA vests in FHFA in its capacity as conservator to the funds. (2-3, citations omitted)

Epstein acknowledges that his “work on this project has been supported by several hedge funds that have hired me as a legal consultant, analyst, and commentator on issues pertaining to litigation and legislation over Fannie and Freddie discussed in this article.”(1, author footnote) Nonetheless, as a leading scholar, particularly of Takings jurisprudence, his views must be taken very seriously.

Epstein states that “major question of both corporate and constitutional law is whether the actions taken unilaterally by these key government officials could be attacked on the grounds that they confiscated the wealth of the Fannie and Freddie shareholders and thus required compensation from the Government under the Takings Clause. In addition, there are various complaints both at common law and under the Administrative Procedure Act.” (4)

Like Jonathan Macey, Epstein forcefully argues that the federal government has greatly overreached in its treatment of Fannie and Freddie. I tend in the other direction. But I do agree with Epstein that it “is little exaggeration to say that the entire range of private, administrative, and constitutional principles will be called into question in this litigation.” (4) Because of that, I am far from certain how the courts should and will decide the immensely complicated claims at issue in these cases.

In any event, Epstein’s article should be read as a road map to the narrative that the plaintiffs will attempt to convey to the judges hearing these cases as they slowly wend their way through the federal court system.