The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
Tuesday, in Perry Capital LLC v. Mnuchin, a divided panel of the U.S. Court of Appeals for the D.C. Circuit concluded that suits by investors against Fannie Mae and Freddie Mac are precluded by the Recovery Act. Judge Patricia Ann Millett and Senior Judge Douglas H. Ginsburg co-wrote the majority opinion. Judge Janice Rogers Brown dissented.
Millett and Ginsburg summarized the case and their 70-page opinion as follows:
In 2007-2008, the national economy went into a severe recession due in significant part to a dramatic decline in the housing market. That downturn pushed two central players in the United States' housing mortgage market-the Federal National Mortgage Association ("Fannie Mae" or "Fannie") and the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "Freddie")—to the brink of collapse. Congress concluded that resuscitating Fannie Mae and Freddie Mac was vital for the Nation's economic health, and to that end passed the Housing and Economic Recovery Act of 2008 ("Recovery Act"), Pub. L. No. 110-289, 122 Stat. 2654 (codified, as relevant here, in various sections of 12 U.S.C.). Under the Recovery Act, the Federal Housing Finance Agency ("FHFA") became the conservator of Fannie Mae and Freddie Mac.
In an effort to keep Fannie Mae and Freddie Mac afloat, FHFA promptly concluded on their behalf a stock purchase agreement with the Treasury Department, under which Treasury made billions of dollars in emergency capital available to Fannie Mae and Freddie Mac (collectively, "the Companies") in exchange for preferred shares of their stock. In return, Fannie and Freddie agreed to pay Treasury a quarterly dividend in the amount of 10% of the total amount of funds drawn from Treasury. Fannie's and Freddie's frequent inability to make those dividend payments, however, meant that they often borrowed more cash from Treasury just to pay the dividends, which in turn increased the dividends that Fannie and Freddie were obligated to pay in future quarters. In 2012, FHFA and Treasury adopted the Third Amendment to their stock purchase agreement, which replaced the fixed 10% dividend with a formula by which Fannie and Freddie just paid to Treasury an amount (roughly) equal to their quarterly net worth, however much or little that may be.
A number of Fannie Mae and Freddie Mac stockholders filed suit alleging that FHFA's and Treasury's alteration of the dividend formula through the Third Amendment exceeded their statutory authority under the Recovery Act, and constituted arbitrary and capricious agency action in violation of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A). They also claimed that FHFA, Treasury, and the Companies committed various common-law torts and breaches of contract by restructuring the dividend formula.
We hold that the stockholders' statutory claims are barred by the Recovery Act's strict limitation on judicial review. See 12 U.S.C. § 4617(f). We also reject most of the stockholders' common-law claims. Insofar as we have subject matter jurisdiction over the stockholders' common-law claims against Treasury, and Congress has waived the agency's immunity from suit, those claims, too, are barred by the Recovery Act's limitation on judicial review. Id. As for the claims against FHFA and the Companies, some are barred because FHFA succeeded to all rights, powers, and privileges of the stockholders under the Recovery Act, id. § 4617(b)(2)(A); others fail to state a claim upon which relief can be granted. The remaining claims, which are contract-based claims regarding liquidation preferences and dividend rights, are remanded to the district court for further proceedings.
Brown wrote a colorful 29-page dissent. Her opinion begins:
One critic has called it "wrecking-ball benevolence," James Bovard, Editorial, Nothing Down: The Bush Administration's Wrecking-Ball Benevolence, BARRON'S, Aug. 23, 2004, http://tinyurl.com/Barrons-Bovard; while another, dismissing the compassionate rhetoric, dubs it "crony capitalism," Gerald P. O'Driscoll, Jr., Commentary, Fannie/Freddie Bailout Baloney, CATO INST., http://tinyurl.com/Cato-O-Driscoll (last visited Feb. 13, 2017). But whether the road was paved with good intentions or greased by greed and indifference, affordable housing turned out to be the path to perdition for the U.S. mortgage market. And, because of the dominance of two so-called Government Sponsored Entities ("GSE"s)—the Federal National Mortgage Association ("Fannie Mae" or "Fannie") and the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "Freddie," collectively with Fannie Mae, the "Companies")—the trouble that began in the subprime mortgage market metastasized until it began to affect most debt markets, both domestic and international.
By 2008, the melt-down had become a crisis. A decade earlier, government policies and regulations encouraging greater home ownership pushed banks to underwrite mortgages to allow low-income borrowers with poor credit history to purchase homes they could not afford. Banks then used these risky mortgages to underwrite highly-profitable mortgage-backed securities—bundled mortgages—which hedge funds and other investors later bought and sold, further stoking demand for ever-riskier mortgages at ever-higher interest rates. Despite repeated warnings from regulators and economists, the GSEs' eagerness to buy these loans meant lenders had a strong incentive to make risky loans and then pass the risk off to Fannie and Freddie. By 2007, Fannie and Freddie had acquired roughly a trillion dollars' worth of subprime and nontraditional mortgages—approximately 40 percent of the value of all mortgages purchased. And since more risk meant more profit and the GSEs knew they could count on the federal government to cover their losses, their appetite for riskier mortgages was entirely rational.
The housing boom generated tremendous profit for Fannie and Freddie. But then the bubble burst. Individuals began to default on their loans, wrecking neighborhoods, wiping out the equity of prudent homeowners, and threatening the stability of banks and those who held or guaranteed mortgage-backed assets. In March 2008, Bear Sterns collapsed, requiring government funds to finance a takeover by J.P. Morgan Chase. In July, the Federal Deposit Insurance Corporation (the "FDIC") seized IndyMac. But Bear Sterns and IndyMac-huge companies, to be sure-paled in comparison to Fannie and Freddie, which together backed $5 trillion in outstanding mortgages, or nearly half of the $12 trillion U.S. mortgage market. In late-July 2008, Congress passed and President Bush signed the Housing and Economic Recovery Act of 2008, authorizing a new government agency, the Federal Housing Finance Agency ("FHFA" or the "Agency"), to serve as conservator or receiver for Fannie and Freddie if certain conditions were met; Fannie and Freddie were placed into FHFA conservatorship the following month. Only weeks thereafter, Lehman Brothers failed, the government bailed out A.I.G., Washington Mutual declared bankruptcy, and Wells Fargo obtained government assistance for its buy-out of Wachovia.
There is no question that FHFA was created to confront a serious problem for U.S. financial markets. The Court apparently concludes a crisis of this magnitude justifies extraordinary actions by Congress. Perhaps it might. 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. Moreover, to remain within constitutional parameters, even a less-sweeping delegation of authority would require an explicit and comprehensive framework. See Whitman v. Am. Trucking Ass'ns, Inc., 531 U.S. 457, 468 (2001) ("Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions-it does not, one might say, hide elephants in mouseholes.") 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.
Perhaps this was a bad idea. The perils of massive GSEs had been indisputably demonstrated. Congress could have faced up to the mess forthrightly. Had both Companies been placed into immediate receivership, the machinations that led to this litigation might have been avoided. See Thomas H. Stanton, The Failure of Fannie Mae and Freddie Mac and the Future of Government Support for the Housing Finance System, 14-15 (Brooklyn L. Sch., Conference Draft, Mar. 27, 2009), http://tinyurl.com/Stanton-Conference (arguing Fannie and Freddie could have been converted into wholly owned government corporations with limited lifespans in order to stabilize the mortgage market). But the question before the Court is not whether the good guys have stumbled upon a solution. There are no good guys. The question is whether the government has violated the legal limits imposed on its own authority.
Regardless of whether Congress had many options or very few, it chose a well-understood and clearly-defined statutory framework-one that drew upon the common law to clearly delineate the outer boundaries of the Agency's conservator or, alternatively, receiver powers. FHFA pole vaulted over those boundaries, disregarding the plain text of its authorizing statute and engaging in ultra vires conduct. Even now, FHFA continues to insist its authority is entirely without limit and argues for a complete ouster of federal courts' power to grant injunctive relief to redress any action it takes while purporting to serve in the conservator role. See FHFA Br. 21. While I agree with much of the Court's reasoning, I cannot conclude the anti-injunction provision protects FHFA's actions here or, more generally, endorses FHFA's stunningly broad view of its own power. Plaintiffs- not all innocent and ill-informed investors, to be sure-are betting the rule of law will prevail. In this country, everyone is entitled to win that bet. Therefore, I respectfully dissent from the portion of the Court's opinion rejecting the Institutional and Class Plaintiffs' claims as barred by the antiinjunction provision and all resulting legal conclusions.