Monday, March 2, 2015

Treasury, FHFA Are Ignoring the Law in Their Handling of Fannie and Freddie Conservatorships

Treasury, FHFA Are Ignoring the Law in Their Handling of Fannie and Freddie Conservatorships

Legal Disputes
Some interpret HERA and comments at the time from Treasury Secretary Paulson to mean that HERA allows the government to take over the assets of Fannie Mae and Freddie Mac with all powers of the shareholders so long as the conservatorship remains in effect.
But, as noted, this ignores the fact that HERA requires FHFA, as conservator, to do whatever is needed to “conserve and preserve” the GSE's assets and the explicit and separate direction to the FHFA, as conservator, to take steps necessary to put the regulated entity in a “sound and solvent condition.” If that is not possible, then HERA requires the FHFA to place the GSEs into receivership. The law does not allow an endless conservatorship as a means to strip value, trample stakeholders' rights, and transform the GSEs into governmental housing agencies.
Some would argue that Treasury is acting within its authority given that it infused billions of dollars into the GSEs in order to keep them solvent. No one disputes that Treasury acted decisively and in the interests of shareholders and the public at large in preventing the collapse of Fannie and Freddie. However, Treasury's actions in the Third Amendment completely changed the relationship between Treasury and the GSEs from one in which Treasury provided statutory assistance that the GSEs would repay, which would be consistent with FDIC precedents, to one in which Treasury seizes all current and future net worth. 
This latter approach is confiscatory and has no relationship to repayment of the assistance provided and completely disregards all past precedents from FDIC open bank assistance and conservatorships. While Treasury is entitled to be, and has been, repaid for the assistance provided, nothing in HERA or its antecedents supports the Third Amendment. Treasury has no authority to use Fannie and Freddie as a never-ending revenue stream.

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