Judges with the U.S. Seventh Circuit Court of Appeals upheld a federal judge’s rejection of arguments that the Federal Housing Finance Agency undercut Fannie Mae and Freddie Mac investors by giving the U.S. Treasury too much authority when it was trying to save the home-lending behemoths.
In 2017, a group of private investors in Fannie Mae and Freddie Mac sued both the Treasury and the agency. The investors claim that the Treasury overstepped its authority when it set its dividend rights equal to the companies’ outstanding net worth and that the agency violated its duties as a conservator by going along with the Treasury’s plans. Both the district and appellate courts found that the plaintiffs failed to state a claim.
The agency was created at the height of the 2008 financial crisis as the conservator of Fannie and Freddie, publicly traded companies chartered by Congress that held trillions of dollars in home loans. At the same time, Congress authorized the Treasury to purchase Fannie and Freddie’s debts through the end of 2009. The shares the Treasury bought in Fannie Mae and Freddie Mac “gave it extraordinary governance and economic rights,” the three-judge panel wrote.
Stabilizing the plummeting home-loan market required more money and time than Congress anticipated. Between 2008 and 2012, the companies drew on more than $187 billion from the Treasury. After twice increasing its funding pledge, the Treasury amended its stock purchase agreement to set its dividend rights equal to the companies’ outstanding net worth.
Christian Ambler Stone & Johnson
Prior to that amendment, the Treasury received a fixed dividend and an annual commitment fee. The amendment did away with the fee and replaced the fixed dividend with a variable one that funneled the majority of any profits the companies might clear to the federal government. Investors cried foul, claiming the amendment went into effect just as the companies were returning to profitability.
The agency and the Treasury argued that the net-worth dividend protected the companies, which had been borrowing from the Treasury to pay fixed-rate dividends and were nearing the end of the $200 billion the Treasury had pledged to invest.
In its analysis, the appellate court pointed out that the statute creating the agency prohibits judicial interference with the agency’s role as conservator – making it impossible for the plaintiffs to obtain the relief they sought.
Judges said the plaintiffs’ claim the agency failed in its duties as a conservator was misplaced. The plaintiffs argued that the conservator is required to “preserve and conserve assets and property” and the net-worth dividend amendment dissipated assets. However, the judges wrote, nothing in the law imposes such a requirement on a conservator. Even if it did, they wrote, the plaintiffs could not prove that agreeing to the amendment ran afoul of the agency’s duties. The language of the statute gives the agency discretion in fulfilling its obligations.
“[The statute] uses the permissive ‘may’ rather than the mandatory ‘shall’ or ‘must’ to introduce the agency’s power as a conservator to ‘preserve and conserve’ Freddie’s and Fannie’s assets,” the judges wrote. “By agreeing to the [amendment] the agency did not violate its duty to conserve Fannie and Freddie’s assets because it had no rigid duty to do so.”
The judges also dismissed the argument that the agency had put itself under the direction of the Treasury. The same law that prevents any other agency from exercising control over the agency also authorizes the Treasury to gain securities in the companies under mutual agreements with the agency.
“We read these provisions to mean that, so long as the agency remained free to reject the terms offered by Treasury and to exercise its independent judgment, nothing prevented the agency from taking Treasury’s advice or agreeing to its terms,” the judges wrote.
As for the Treasury overstepping its authority, the court pointed to language in the statute that permits the Treasury from buying securities in Fannie and Freddie “on such terms and conditions as the secretary may determine.” Even if the Treasury was not protected by the statute from judicial interference, it had acted within its rights, judges said.
The case was decided by Circuit Judges Diane P. Wood, William J. Bauer and Frank H. Easterbrook.
Plaintiffs are represented by attorney Christian D. Ambler, of the firm of Stone & Johnson, Chtd, of Chicago.
The FHFA is represented in the action by the Chicago U.S. Attorney’s office, and attorneys with the firms of Arnold & Porter, of Washington, D.C., and Chuhak & Tecson, of Chicago.