More news in the ever-evolving story of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA).

Fannie Mae

wow…. this is a fantastic takedown of Treasury’s arguments… When your opposition uses the cases you cite to make your point to effectively bitch slap your argument, you’ve got a weak hand.  Further, given the timing of this, only a week post Treasury’s filing one cannot escape the thought they they anticipated Treasury’s arguments and were prepared in advance to respond.  Now, without even seeing the reply from $FAIRX I can’t see how the Treasury gets what it wants in a dismissal.

First lets take a look back at the post I wrote when the government responded.

In that post I laid out the reasons I thought there was material weakness in the case the gov’t was then making:

“They use as their prime example the FDIC when it takes over banks. In those circumstances shareholders have no rights to then sue the FDIC for its actions. But I see material weaknesses in that line of thinking.

  1. The FDIC, when it takes over banks does not operate in conjunction with or partner with the US Treasury
  2. The FDIC does not give the US Treasury a controlling interest in those banks
  3. Banks are not Chartered by the US Congress
  4. Banks are not “government sponsored entities”
  5. Congress does not directly oversea banks operations
  6. When the FDIC liquidates banks, the assets are sold to other banks, not given to the US Treasury
  7. When the FDIC enters bank, it does so with an express plan, that plan is not altered unilaterally when the initial goal is in fact being accomplished
  8. When the FDIC takes over a bank,  it does not then encourage the public to continue to make investments in the securities of that bank
  9. If the bank is being rehabilitated, the FDIC does not alter terms of investments to favor one investor over every other investor
  10. The FDIC does not need gov’t approval to take over a bank, in no way could they unilaterally against towards to Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)”

Washington Federal responded to the motion today and one passage in particular tell you where they are going:

The Government next claims Plaintiffs lack “standing” to bring this action because, under HERA, it suggests, FHFA assumed all rights of the Companies’ shareholders, including the ability to bring suit. But this argument ignores a well-recognized exception applicable when a conservator has a conflict of interest because of its entanglement with “closely related” government entities. As described above, the Complaint alleges the existence of such an entanglement here. The Government further claims that Plaintiffs lack standing to recover the Companies’ lost profits. But Plaintiffs are not seeking to recover profits that belong to the Companies themselves: they are seeking to recover for the destruction of the value of their shares. Moreover, Plaintiffs can directly recover based on the Companies’ overpayment to the Government for access to Treasury funds, which caused Plaintiffs to lose the economic value and voting power of their shares.

Plaintiffs have sufficiently alleged that the conservatorships constituted an unconstitutional taking. As an initial matter, Plaintiffs’ claims are ripe for review. Indeed, the Government would force Plaintiffs to wait until their claims were barred by the statute of limitations before this Court could find them sufficiently “ripe.” More substantively, this Court has recently reiterated in Starr International Co. v. United States that Plaintiffs have a cognizable property interest in their shares. The Government’s actions clearly affected the value of those shares and Plaintiffs’ other ownership interests. Plaintiffs had reasonable-investment backed expectations that the Government would not take over the Companies for its own purposes, thereby destroying the value of their shares and their rights as shareholders. As much as the Government would like the Court to believe otherwise, the Companies were not engaged in banking and thus were not part of the “highly regulated” banking industry, where regulatory takeovers are more common. Thus, there is no basis for suggesting that Plaintiffs should have reasonably anticipated the Government’s actions here, particularly where, just months before the conservatorships were imposed, the Government repeatedly represented that there was no need to impose them because the Companies were financially sound. The Government was not “rescuing” the Companies as would be done in a traditional conservatorship. At best, it was cleaning up its own mess after directing the Companies to make high-risk investments.

As I noted before the gov’t’s attempts to paint this as a simple FDIC like action fail almost every reasonable test based on the inextricable relationship of the FHFA and Treasury. The FHFA cannot pretend to be a “non gov’t” entity.  As for the claim:

The Government’s actions were not lawful under HERA. If the Government’s argument is true, the Government could have imposed the conservatorships to do whatever it wished with the Companies. Instead, HERA established FHFA’s duty to preserve the Companies’ assets, and that duty creates a money mandating obligation. FHFA has done precisely the opposite by giving away the Companies’ assets virtually for free to Treasury.

Now, this complaint goes a step further and says the very act of the conservatorship was illegal:

HERA provides for 12 circumstances under which FHFA could place the Companies into conservatorship. 12 U.S.C. § 4617(a)(3)(A)-(L); Compl. ¶ 91. None of these statutory grounds existed with respect to either Company because:

(1) the Companies’ assets were greater than their obligations to their creditors and others, see id. ¶¶ 93-98; (

2) neither of the Companies had experienced a substantial dissipation of assets or earnings due to i) any violation of any provision of federal or state law or ii) any unsafe or unsound practice, see id. ¶¶ 99-105;

(3) neither Company was operating in an unsafe or unsound condition to transact business, see id. ¶¶ 106- 12;5

(4) neither Company was in violation of a cease or desist order, see id. ¶¶ 113-15;

(5) neither Company concealed or refused to submit any books and records, see id. ¶¶ 116-18;

(6) the Companies were able to pay their obligations and meet the demands of their creditors, see id. ¶¶ 119-24;

(7) neither Company had incurred or was likely to incur losses that would deplete all or substantially all of their capital, see id. ¶¶ 125-33;

(8) neither Company violated any law or regulation, or engaged in any unsafe or unsound practice or condition that would likely cause insolvency, a substantial dissipation of assets or earnings, or a weakening of its condition, see id. ¶¶ 134-36;6

(9) the Companies did not consent to the appointment of a conservator, see id. ¶¶ 137-40;7 (

10) neither Company was undercapitalized, see id. ¶¶ 141-48;

(11) or critically undercapitalized, see id. ¶¶ 149-51;8 and

(12) neither Company was found guilty of money laundering, see id. ¶¶ 152-53.

Thus, there was no legal basis for the Government to place the Companies into receivership or conservatorship. Compl. ¶ 92.

Now, the gov’t claims the Conservatorship was legal because the entities were “operating in an unsafe and unsound manner” ((3) above). Here is the problem with that. They operated at the direction of both Congress and their regulator OFHEO (later FHFA). So, if that is true,

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