Today’s split decision by a three-judge federal appeals panel on the legality of the Net Worth Sweep should not be seen as the end of shareholders’ quest for justice.  The judges directed U.S. District Court Judge Royce Lamberth to reconsider important portions of the case and plaintiffs can still appeal today’s decision to the U.S. Supreme Court.

While the Appeals panel upheld Lamberth’s ruling that the government acted within its power under the Housing and Economic Recovery Act (HERA) in implementing the Net Worth Sweep in 2012, the judges said the allegations by investors of “breach of contract, breach of the implied covenant of good faith, and fair dealing regarding liquidation preferences and the claim for breach of the implied covenant with respect to dividend rights” need another review.  In essence, some Fannie Mae and Freddie Mac investors could pursue monetary – aka “takings” damages to compensate them for their loss.

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Despite today’s ruling by the Appeals Court for the U.S. Circuit Court for the District of Columbia, it is still hard to imagine that Congress gave the Federal Housing Finance Agency carte blanche to do whatever it wanted with Fannie Mae and Freddie Mac. It seems unlikely that HERA – or any other statute – grants the government such broad power to trample on property rights. Remember, even Judge Lamberth, in his October 2014 dismissal of plaintiffs’ claims, conceded that the Net Worth Sweep could “raise eyebrows.” Nonetheless, he saw the law as granting FHFA very wide latitude.

In a dissent from her two colleagues today, Janice Rogers Brown, a 2005 nominee of President George W. Bush, conceded FHFA was enacted at a time of turmoil for financial markets and commented, “But even in a time of exigency, a nation governed by the rule of law cannot transfer broad and unreviewable power to a government entity to do whatsoever it wishes with the assets of these Companies.”  She insisted Congress would have had to create a more “explicit and comprehensive framework” to justify even “a less-sweeping delegation of authority.”

We have cited many times an analysis of HERA by Mark Calabria, a former congressional aide, and Michael Krimminger, a former chief counsel for the Federal Deposit Insurance Corporation, both of whom were intimately involved in drafting HERA. They have made clear Congress consciously drew heavily from the Federal Deposit Insurance Act (FDIA) and Financial Institutions Recovery, Reform and Enforcement Act of 1989 (FIRREA) to define FHFA’s powers and duties.

For Judge Brown’s part, “Here, Congress did not endow FHFA with unlimited authority to pursue its own ends; rather, it seized upon the statutory text that had governed the FDIC for decades and adapted it ever so slightly to confront the new challenge posed by Fannie and Freddie.”

We can only speculate the U.S. Supreme Court might look at HERA and the Sweep and conclude the government’s action does more than “raise eyebrows” and instead veers outside Constitutional limits on government.

Putting aside the painstaking analysis of issues such as whether the plaintiffs had the right to sue the government or whether the government exceeded its authority, practical and serious policy questions remain.  So long as the Sweep continues, two of the largest financial services companies in the world will be routinely stripped of capital. Without an adequate base of capital, taxpayers could be at risk for having to shore up the companies in the event of another housing market downturn.  More broadly, the continued conservatorship and deadlock over the future role of Fannie and Freddie ill serves capital markets and average Americans looking to finance a home.

As Investors Unite Executive Director Tim Pagliara commented today, “We hope that the Trump Administration will put an end to this wrong by ending the sweep now and restoring the rights of shareholders.”