Fannie Mae, Freddie Mac: FHFA Claims Eviscerated

Fannie Mae, Freddie Mac: FHFA Claims Eviscerated

Fannie Mae

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This is great…..this is simply the introduction to their reply to the US motion for summary judgment. What is particularly amusing (in the full brief at end) is that he points out Treasury in their motion acquiesce to plaintiffs claims of prudential standing (for damages) but ague their APA (administrative protection act) claims are barred while FHFA acquiesces to plaintiffs APA claims but says the prudential standing claim should be barred:

FHFA: Conserving and preserving the assets of Fannie Mae and Freddie Mac


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By the end of this month, FHFA, charged by statute with a mandate of conserving and preserving the assets of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), will have sent $158 billion from the Companies’ treasuries to the government’s Treasury pursuant to the Net Worth Sweep—$130 billion more than Treasury previously would have received under the 10 percent fixed dividend provided in its stock agreements. Treasury and FHFA would have this Court believe that they had no idea the Net Worth Sweep would give Treasury such a windfall. The Net Worth Sweep was needed, the agencies say, to save Fannie Mae and Freddie Mac from a “downward spiral” caused by borrowing money from Treasury to pay Treasury a cash dividend that could have been paid in- kind, without any borrowing. In their view, the massive transfer of wealth to Treasury is just a happy (for the government) coincidence.

Of course, FHFA and Treasury are desperate to prevent this Court from looking too closely at this narrative. And for good reason, as the contemporaneous statements from the agencies in 2012 reveal a very different rationale for the Sweep Amendment: to prevent Fannie Mae and Freddie Mac from “retain[ing] profits” or “rebuild[ing] capital,” to begin the “winding up” of the Companies’ affairs, and to “ensure [that] existing common equity holders will not have access to any positive earnings from the [Companies] in the future.”

The agencies had no authority to embark on that course in 2012. Accordingly, Plaintiffs ask this Court to vacate the illegal Sweep Amendment.

This Court has jurisdiction. Treasury and FHFA raise a host of frivolous and irrelevant challenges to Plaintiffs’ standing to bring their APA claims. But none of these charges undermines Plaintiffs’ core injury: the Sweep Amendment guarantees that the liquidation preferences in Plaintiffs’ preferred stock are worthless. This harm constitutes a direct injury, one that does not belong to Fannie Mae and Freddie Mac; the agencies’ invocation of prudential standing notions and FHFA’s authority to prosecute derivative litigation thus has no applicability here.

Fannie Mae, Freddie Mac: Plaintiffs’ APA claims

Similarly, HERA’s limitation on judicial review—12 U.S.C. § 4617(f)—is no bar to Plaintiffs’ APA claims. That provision prohibits suits that “restrain or affect the exercise or functions of [FHFA] as conservator” and thus does not prohibit suit where, as here, FHFA exceeds its conservatorship authority or acts in a role that is plainly not that of a conservator. And the section has no relevance at all to claims against Treasury.

On the merits, HERA provided explicitly that, after 2009, Treasury was permitted only to exercise rights it had received in connection with the Companies’ securities. Treasury’s argument that the Purchase Agreements granted it a “right” to agree with FHFA to amend the Purchase Agreements is risible, as a “right to amend” is not a right that Treasury received in the Purchase Agreements; the capacity of the parties to agree to amend their contract exists wholly apart from their Purchase Agreements. The Sweep Amendment is best understood as a purchase—under the term’s ordinary meaning, the securities laws, and Treasury’s own tax regulations—in which Treasury exchanged its old securities bearing a fixed-rate dividend for brand-new securities granting Treasury all Fannie Mae and Freddie Mac’s net worth in perpetuity. Under any view of the facts, Treasury exceeded its statutory authority by executing the Sweep Amendment.

FHFA May wind down Fannie Mae and Freddie Mac

FHFA’s contentions that the Sweep Amendment is consistent with its conservatorship authority similarly fall flat. As the Companies’ conservator, FHFA is obligated to preserve and conserve their assets with a view to the Companies’ rehabilitation or, as FHFA once said, the resumption of “normal business operations.” It is obliged to place the Companies in a safe and solvent condition, which means working to build a capital cushion that would help the Companies withstand an economic downturn. The Sweep Amendment renders those goals impossible, as it confines the Companies to a zombie-like existence, giving Treasury all of its available capital in good quarters, and living off the dole in others. Indeed, the one-sidedness of the Sweep Amendment and the absence of any evidence that FHFA exercised its independent judgment about the need to alter the existing dividend arrangement show that FHFA violated HERA by acting at Treasury’s direction. FHFA claims that its powers to transfer the Companies’ assets or otherwise to act in the Companies’ or FHFA’s best interests provide authority to agree to a Net Worth Sweep, but those “powers” are limited by the fundamental goal of any conservatorship, which is to preserve the entity as a going concern. FHFA’s argument that it may “wind down” Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in preparation for liquidation collapses any distinction between receivers and conservators, as it would give conservators authority to ransack Fannie Mae and Freddie Mac, with receivers left only to turn out the lights. HERA does not authorize such an irresponsible form of “conservatorship.”

Fannie Mae, Freddie Mac’s deferred tax assets

Treasury and FHFA executed the Sweep Amendment contrary to the limited authority given them by Congress; they also did so arbitrarily and capriciously. The agencies ignored salient data, including Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s tens of billions of dollars in deferred tax assets; they failed to consider obvious alternative solutions that would have solved the “problem” FHFA and Treasury perceived, without harming the Companies’ shareholders or Fannie Mae and Freddie Mac themselves; and they never considered the congressionally required factors—a point that neither agency disputes. The agencies seek to hide behind purported deference owed to “predictive judgments.” But the law is clear that agencies always must act rationally and consider alternatives.

The rule of law demands that federal agencies obey the limits imposed by Congress, even during difficult economic times. No legal principle supports Treasury’s massive money grab, and nothing in HERA or any other law prohibits this Court from vacating the illegal Sweep Amendment. This Court must act to ensure that FHFA and Treasury act lawfully, lest other agencies also decide that the APA and organic statutes may be overridden or ignored.

Here is the whole thing, take the time to read it:

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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