Tag Archives: United States Court of Appeals for the Eighth Circuit

Common Sense for the Shareholders of Fannie and Freddie

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The United States Court of Appeals for the Eighth Circuit issued a mixed decision for Fannie & Freddie shareholders in  Bhatti v. Federal Housing Finance Agency, No. 18-2506 (8th Cir. Oct. 6, 2021).  While the Court ruled (consistent with the Supreme Court’s recent ruling in Collins v. Yellin, 141 S. Ct. 1761 (2021)) that the shareholders could sue for retrospective relief (damages), it otherwise ruled against the shareholders.  The court ends on what I found to be a very commonsensical note in its discussion of the nondelegation claim:

Congress’s delegation of authority directs the FHFA to act as a “conservator,” with clear and recognizable instructions. 12 U.S.C. § 4617(a). “[T]he Agency is authorized to take control of a regulated entity’s assets and operations, conduct business on its behalf, and transfer or sell any of its assets or liabilities.” Collins, 141 S. Ct. at 1776, citing 12 U.S.C. §§ 4617(b)(2)(B)-(C), (G). “When the FHFA exercises these powers, its actions must be ‘necessary to put the regulated entity in a sound and solvent condition’ and must be ‘appropriate to carry on the business of the regulated entity and preserve and conserve [its] assets and property.’” Id. (alteration in original), quoting 12 U.S.C. § 4617(b)(2)(D). “Thus, when the FHFA acts as a conservator, its mission is rehabilitation, and to that extent, an FHFA conservatorship is like any other.” Id. There is one difference: “when the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the Agency and, by extension, the public it serves.” Id. But this difference clarifies that serving the public is one goal of the FHFA’s conservatorship; it does not render the delegation unintelligible. See id. (explaining how the FHFA works to rehabilitate housing in the public interest under the statute). In light of the Court’s identification of the principles guiding the FHFA, it is clear those principles are intelligible. See Saxton v. Fed. Hous. Fin. Agency, 901 F.3d 954, 960 (8th Cir. 2018) (Stras, J., concurring) (“The provision is broad but not boundless.”). Congress’s delegation in the Recovery Act was permissible. Id. at 963 (“Picking among different ways of preserving and conserving assets, deciding whose interests to pursue while doing so,
and determining the best way to do so are all choices that the Housing and Economic Recovery Act clearly assigns to the FHFA, not the courts.”). This court affirms dismissal of the nondelegation claim. Page 6.

The plain reading of the Housing and Economic Recovery Act gave the FHFA broad authority to act on the public’s behalf.  The FHFA acted within that broad authority.  The court therefore rightly defers to the FHFA’s response to the financial crisis.  Case closed?

 

 

GSE Shareholders Floored, Again

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The United States Court of Appeals for the Eighth Circuit issued an opinion in Saxton v. FHFA (No. 17-1727, Aug. 23, 2018). The Eighth Circuit joins the Fifth, Sixth, Seventh and D.C. Circuits in rejecting the arguments of Fannie and Freddie shareholders that the Federal Housing Finance Agency exceeded its authority as conservator of Fannie Mae and Freddie Mac and acted arbitrarily and capriciously. The Court provides the following overview:

     The financial crisis of 2008 prompted Congress to take several actions to fend off economic disaster. One of those measures propped up Fannie Mae and Freddie Mac. Fannie and Freddie, which were founded by Congress back in 1938 and 1970, buy home mortgages from lenders, thereby freeing lenders to make more loans. See generally 12 U.S.C. § 4501. Although established by Congress, Fannie and Freddie operate like private companies: they have shareholders, boards of directors, and executives appointed by those boards. But Fannie and Freddie also have something most private businesses do not: the backing of the United States Treasury. 

     In 2008, with the mortgage meltdown at full tilt, Congress enacted the Housing and Economic Recovery Act (HERA or the Act). HERA created the Federal Housing Finance Agency (FHFA), and gave it the power to appoint itself either conservator or receiver of Fannie or Freddie should either company become critically undercapitalized. 12 U.S.C. § 4617(a)(2), (4). The Act includes a provision limiting judicial review: “Except as  provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver.” Id. § 4617(f). 

     Shortly after the Act’s passage, FHFA determined that both Fannie and Freddie were critically undercapitalized and appointed itself conservator. FHFA then entered an agreement with the U.S. Department of the Treasury whereby Treasury would acquire specially-created preferred stock and, in exchange, would make hundreds of billions of dollars in capital available to Fannie and Freddie. The idea was that Fannie and Freddie would exit conservatorship when they reimbursed the Treasury.

     But Fannie and Freddie remain under FHFA’s conservatorship today. Since the conservatorship began, FHFA and Treasury have amended their agreement several times. In the most recent amendment, FHFA agreed that, each quarter, Fannie and Freddie would pay to Treasury their entire net worth, minus a small buffer. This so-called “net worth sweep” is the basis of this litigation. 

     Three owners of Fannie and Freddie common stock sued FHFA and Treasury, claiming they had exceeded their powers under HERA and acted arbitrarily and capriciously by agreeing to the net worth sweep. The shareholders sought only an injunction setting aside the net worth sweep; they dismissed a claim seeking money damages. Relying on the D.C. Circuit’s opinion in Perry Capital LLC v. Mnuchin, 864 F.3d 591 (D.C. Cir. 2017), the district court dismissed the suit.

What amazes me as a longtime watcher of the GSE litigation is how supposedly dispassionate investors lose their heads when it comes to the GSE lawsuits. They cannot seem to fathom that judges will come to a different conclusion regarding HERA’s limitation on judicial review.

While I do not rule out that the Supreme Court could find otherwise, particularly if Judge Kavanaugh is confirmed, it seems like this unbroken string of losses should provide some sort of wake up call for GSE shareholders. But somehow, I doubt that it will.