The Conservatorships of Fannie Mae and Freddie Mac: Actions Violate HERA and Established Insolvency Principles
Unfortunately, Treasury's and FHFA's actions in the conservatorships of the Companies after the 2012 Third Amendment and the advent of the net worth sweeps violate these longstanding principles of U.S. and international insolvency law as well as the express requirements of HERA. Since HERA was designed to mirror the FDIA conservatorship and receivership provisions, including the creditor protections, it should be interpreted consistent with long-standing interpretations of the parallel FDIA provisions.
The fundamental goals of FDIC interventions into open banks always were to restore the banks to financial health in compliance with regulatory requirements and recover, wherever possible, the FDIC funds injected into the banks.
However, as implemented by Treasury and FHFA, the Companies’ conservatorships serve principally as the instruments for government management of national mortgage policy and enrichment for Treasury. The Companies remain the principal sources of liquidity to the U.S. mortgage industry and the dominant secondary mortgage market companies through their issuance of guaranteed mortgage-backed securities, and have produced billions of dollars of new value. Despite having been repaid far more than it injected into the Companies, Treasury has ignored the creditor protections required under HERA or, for bank shareholders and other stakeholders, under the FDIA by using the conservatorships to strip all value from the shareholders, rather than complying with the HERA requirement that it "preserve and conserve" the Companies for the benefit of all stakeholders. In addition to violating the fundamental element of creditor protection required by statute and the principles underlying all insolvency laws, Treasury has consciously prevented accumulation of any buffer against future losses - thereby ensuring that taxpayers will again bear the risks. Treasury has purposefully refused to return the Companies to a "sound and solvent" condition as required by HERA. In internal documents, Treasury officials have expressly stated that Treasury will not allow the rehabilitation of the Companies or any return of value to the stakeholders. This is all due to a Treasury decision, rather than a decision consistent with FHFA's duties as conservator, implemented through the Third Amendment.