The Supreme Court heard arguments in a case involving Fannie Mae and Freddie Mac last week. Now we wait for the court’s official opinion, which will take several months. Here’s a look at the two sets of issues raised in the Collins v. Mnuchin case.
Claims in the Supreme Court case for Fannie Mae, Freddie Mac
Analyst Dick Bove of Odeon Capital divided the issues in the Supreme Court case into two groups for Fannie Mae and Freddie Mac. One is constitutional and questions whether or not the Federal Housing Finance Agency and its director's position are constitutional. The other is statutory and questions whether the FHFA exceeded its authority in creating the net worth sweep that sends all of the government-sponsored enterprises' earnings into the Treasury as dividends for the senior preferred issues.
Bove said the most important claim of the two is the statutory claim. If shareholders win that one, it means the net worth sweep is finally dead. Shareholders are widely expected to win the statutory claim, and Bove has now listed which justices he expects to vote each way.
How the justices could vote
Based on the questions they asked, he thinks shareholders will win the issue involving the net worth sweep six to three. He assumes Justice Clarence Thomas, Justice Samuel Alito, Justice Elena Kagan, Justice Neil Gorsuch, Justice Bret Kavanaugh and Justice Amy Barrett will vote in shareholders' favor. On the other hand, he believes Chief Justice John Roberts, Justice Stephen Breyer, and Justice Sonia Sotomayor will side with the government.
To determine which justices will vote each way, he looked at which ones asked questions. He said in most cases, the justices don't ask a lot of questions on issues they may agree with. He guessed who would vote each way by which of them asked more questions on the core topics.
Bove expects the constitutional issue will be broken down into more than one decision. It's already assumed that the FHFA and its director's position are unconstitutional due to a previous Supreme Court case. However, he said it's unlikely that the acts performed by the FHFA and Director Mark Calabria will be seen as unconstitutional.
According to Bove, if shareholders win the Supreme Court case involving Fannie Mae and Freddie Mac, it is very likely that the junior preferred shares will be recapitalized. He added that the biggest risk is that the Supreme Court issues an opinion on the constitutional issue and then requests fact finding on the statutory issue. He said if that happens, years of additional trials will ensue.
There is also a risk that the Supreme Court will decide not to make a decision on reparations for shareholders. Once again this would mean years of additional fights in the lower courts. In either case, Bove expects the value of the junior preferred shares to rise.
The core arguments in the Supreme Court's Fannie Mae case
Bove also explained the arguments presented before the Supreme Court involving Fannie Mae and Freddie Mac. The government claims that the GSEs had a problem making their dividend payments to the Treasury. It argues that this problem was solved by easing the burden on the companies by people who had the right to resolve the problem, and no one in power disagreed with what was done.
The plaintiffs argue that the FHFA exceeded its authority as conservatory by making it possible for Fannie and Freddie to build capital and become financially healthy again. They add that in the process of doing this, the government harmed the GSEs' shareholders. Further, the plaintiffs argue that the FHFA didn't have the constitutional authority to take the actions it took, so the net worth sweep should be eliminated, and the financial harm that was done to shareholders must be repaired.
Questions posed by the justices
According to Bove, the justices appeared at the beginning to be "outraged at what the government had done." He said they appeared to accept without question that the GSEs were nationalized and that the shareholders had been deprived of their property. He also said the justices appeared to accept that the shareholders had no say in the removal of their rights and that the government that decided to nationalize Fannie and Freddie was the sole beneficiary of the action.
There were fewer questions put to the plaintiffs, and they were allowed to make their case, while the government's attorneys were constantly being interrupted. In the questions put to the plaintiffs, the chief justice wanted to know if shareholders had lost everything.
Justice Breyer appeared to say that the Fannie Mae/ Freddie Mac case shouldn't even be in front of the Supreme Court because it belonged in the claims court as a takings case. Justice Sotomayor asked if there was any need for the court to go beyond the ruling that the FHFA director's position was unconstitutional, which is what the Fifth District Appeals Court said. Several justices led by Roberts questioned the right of shareholders to receive anything.
Interestingly, there were more questions on the constitutionality of the director's position than on any other issue. It was thought that the Seila case involving the constitutionality of the Consumer Financial Protection Bureau and the Fifth Circuit Court of Appeals had settled the constitutionality issue already.