THE CONSERVATOR's FIDUCIARY DUTY
***This article was sent on July 2020 to the WSJ and NYT as an op-ed, but they refused to publish it.***
The recent decision of the Supreme Court to grant the petition of writ of certiorari to an Equity holder of Fannie Mae and Freddie Mac, is the perfect moment to bring up what has become known as the Holy Grail that gives answers to those that wonder why hugely profitable private corporations are still in Conservatorship almost 12 years later: the Fiduciary Duty: the duty or responsibility to act on behalf of someone else. It's comprised, in turn, for several duties and it's different if we are talking about a Conservator or a Trustee.
-Duty of Loyalty: act in the best interests of the enterprises and thus, avoid self-dealing. The Trustee adds the duty to act in the best interests of the beneficiaries.
-Duty of Prudence or Care: both a Conservator and a Trustee shall exercise that standard of care of a prudent person. The Conservatorships of Fannie Mae and Freddie Mac have a peculiarity and is that they are statutory, that is, everything is decided, controlled and required by Law and the strict compliance of the statutory provisions is a responsibility assumed by the Conservator under this Duty of Care.
Everything surrounding them is so statutory, that even the Fiduciary Duty of the Conservator is contemplated in the provision of his Incidental Power: "Take any action authorized by this section, which the Agency (the conservator FHFA) determines is in the best interests of the regulated entity or the Agency (acting as conservator)". There you are, the Duty of Care (actions authorized by the section where the Conservatorship wording is set forth) and the Duty of Loyalty (act in the best interests of the enterprises)
The best interests of undercapitalized enterprises (a Conservatorship is meant for critically undercapitalized enterprises) is their recapitalization. That is, build a Capital reserve to absorb future losses and that is achieved by retaining earnings every quarter. This is also directed by the law HERA, in the provision: Restriction On Capital Distributions when undercapitalized, with the exception: to reduce the obligations with respect to ownership interest (Preferred Stocks)
So, we see that the legislation guides us to the second action in the best interests of the enterprises: reimburse the taxpayer's assistance because it's a debenture that has to be repaid, that is, reduce the obligations Senior Preferred Stocks that the U.S. Treasury received in exchange for the funds provided to the enterprises.
The Duty of Care tells the conservator that he shall uphold the rest of the section, so we should watch if any of the the actions mentioned, are "authorized by this section". The first look is at the Conservator's Powers: "Put the regulated entity in a sound and solvent condition", which means both recapitalization (soundness) and reduce the obligations with the Treasury (solvency), exactly the measures in the best interests of the enterprises mentioned.
HERE IS WHEN THE MAGIC HAPPENS. Everything is synchronized and working in harmony. A Conservator acting as an orchestra director. A perfect machinery of legislation... Wait a minute. This is not what has happened. The Conservator began syphoning capital to the Treasury with a 10% dividend on the Senior Preferred Stocks (Equity), barred in the Restriction On Capital Distributions, and, in 2012, a dividend equal to their Net Worth (all earnings swept to Treasury). Also it handed out a stake of 79.9% Common Stock to the Treasury and, now, the Net Worth is paid to Treasury in kind, that is, in the form of issuance of more obligations Preferred Stocks that will have to be repaid as well. A clear example of self-dealing in Federal Agencies.
The place where the Conservator assumed these duties is shown in the "Succession provision", when the Equity holders, management and the enterprises transferred their Rights and Powers to him, momentarily.
Since the Federal Agency FHFA's actions are a breach violation of statutory provisions, it falls under the jurisdiction of the Court of Federal Claims. Yet, the honorable Chief Judge Sweeney has dismissed all the Fiduciary Duty breach claims brought by Equity holders for lack of standing, because she focuses only on the duty of pursuing the enterprises' interests (not the Equity holders' interests, like receiving a dividend payment), waiving the Duty of Care (strict compliance of the statutory provisions) owed to the Equity holders and enterprises upon the Succession provision.
Assuming someone else's Powers and Rights always comes with responsibilities or duties owed to them, otherwise the trust becomes passive and they are returned.
-Duty of Loyalty: act in the best interests of the enterprises and thus, avoid self-dealing. The Trustee adds the duty to act in the best interests of the beneficiaries.
-Duty of Prudence or Care: both a Conservator and a Trustee shall exercise that standard of care of a prudent person. The Conservatorships of Fannie Mae and Freddie Mac have a peculiarity and is that they are statutory, that is, everything is decided, controlled and required by Law and the strict compliance of the statutory provisions is a responsibility assumed by the Conservator under this Duty of Care.
Everything surrounding them is so statutory, that even the Fiduciary Duty of the Conservator is contemplated in the provision of his Incidental Power: "Take any action authorized by this section, which the Agency (the conservator FHFA) determines is in the best interests of the regulated entity or the Agency (acting as conservator)". There you are, the Duty of Care (actions authorized by the section where the Conservatorship wording is set forth) and the Duty of Loyalty (act in the best interests of the enterprises)
The best interests of undercapitalized enterprises (a Conservatorship is meant for critically undercapitalized enterprises) is their recapitalization. That is, build a Capital reserve to absorb future losses and that is achieved by retaining earnings every quarter. This is also directed by the law HERA, in the provision: Restriction On Capital Distributions when undercapitalized, with the exception: to reduce the obligations with respect to ownership interest (Preferred Stocks)
So, we see that the legislation guides us to the second action in the best interests of the enterprises: reimburse the taxpayer's assistance because it's a debenture that has to be repaid, that is, reduce the obligations Senior Preferred Stocks that the U.S. Treasury received in exchange for the funds provided to the enterprises.
The Duty of Care tells the conservator that he shall uphold the rest of the section, so we should watch if any of the the actions mentioned, are "authorized by this section". The first look is at the Conservator's Powers: "Put the regulated entity in a sound and solvent condition", which means both recapitalization (soundness) and reduce the obligations with the Treasury (solvency), exactly the measures in the best interests of the enterprises mentioned.
HERE IS WHEN THE MAGIC HAPPENS. Everything is synchronized and working in harmony. A Conservator acting as an orchestra director. A perfect machinery of legislation... Wait a minute. This is not what has happened. The Conservator began syphoning capital to the Treasury with a 10% dividend on the Senior Preferred Stocks (Equity), barred in the Restriction On Capital Distributions, and, in 2012, a dividend equal to their Net Worth (all earnings swept to Treasury). Also it handed out a stake of 79.9% Common Stock to the Treasury and, now, the Net Worth is paid to Treasury in kind, that is, in the form of issuance of more obligations Preferred Stocks that will have to be repaid as well. A clear example of self-dealing in Federal Agencies.
The place where the Conservator assumed these duties is shown in the "Succession provision", when the Equity holders, management and the enterprises transferred their Rights and Powers to him, momentarily.
Since the Federal Agency FHFA's actions are a breach violation of statutory provisions, it falls under the jurisdiction of the Court of Federal Claims. Yet, the honorable Chief Judge Sweeney has dismissed all the Fiduciary Duty breach claims brought by Equity holders for lack of standing, because she focuses only on the duty of pursuing the enterprises' interests (not the Equity holders' interests, like receiving a dividend payment), waiving the Duty of Care (strict compliance of the statutory provisions) owed to the Equity holders and enterprises upon the Succession provision.
Assuming someone else's Powers and Rights always comes with responsibilities or duties owed to them, otherwise the trust becomes passive and they are returned.
A certified mail was delivered on July 6th in the Court of Federal Claims, addressed to the judge, explaining the technical concept of the Fiduciary Duty of a Conservator, with the same words the reader has just read.
The Equity holders are watching a bad magic trick where the capital disappears and the property is broken apart, and continue waiting for a rabbit pulled out of the U.S. Officials' hats that redresses all the damages caused.
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