NOS. 19-422 & 19-563
In the Supreme Court of the United States
PATRICK J. COLLINS, ET AL., Petitioners, v. STEVEN T. MNUCHIN, SECRETARY OF THE TREASURY, ET AL., Respondents. ________________
STEVEN T. MNUCHIN, SECRETARY OF THE TREASURY, ET AL., Petitioners, v. PATRICK J. COLLINS, ET AL., Respondents. ________________
On Writs of Certiorari to the United States Court of Appeals for the Fifth Circuit ________________
BRIEF OF AMICUS CURIAE IN SUPPORT OF THE COURT-APPOINTED AMICUS CURIAE
The Law Professor Aaron Nielson outlines a superb explanation of the Charter’s and the Conservatorship’s dynamics in his Amicus Curiae brief. By seeing it down in writing, in black and white, this scandal known as Fanniegate has laid bare a reality that has been denounced a thousand times on internet message boards.
He stresses the Charter’s “special borrowing rights from Treasury §1719 (b)(c)” and linking it to their Public Mission and the ability of the enterprises to get funds on the market at rates similar to Treasuries. Regarding the theme of the constitutionality of the FHFA, he stresses the FHFA’s limited powers of the conservator, thus, limited Executive Power shielded from the Separation-Of-Powers breach that leads to the declaration of unconstitutional Agency, arguing that the FHFA as conservator can’t do something different to what is set forth in the Charter and HERA (although the correct law is the 1992 FHEFSSA, as HERA simply was meant to amend some provisions in the Charter and the FHEFSSA). This strikes the Department of Justice’s assertion that HERA grants the FHFA conservator limitless powers, with words like “HERA’s sweeping grant of powers”. The DOJ simply errs in the interpretation of the conservator’s Incidental Powers §4617(b)(2)(J)(ii) “take any action authorized by this section, which the Agency determines is in the best interests of the regulated entity or the Agency (as conservator)”. The DOJ skips the words “authorized by this section” because it means, as mentioned by judge Willett in this same case, in the 5th Circuit Court en-banc hearing: “FHFA as conservator may not exercise a power beyond the ones granted.”
Therefore, the entire brief of the court-appointed Amicus Curiae comes down to the conclusion that the FHFA can’t negotiate contracts with the UST, pointed out by the Solicitor General in the briefs, if everything is set forth in the laws and regulations.
The question is why we got here if everything is statutory with regard to the enterprises. It’s pointless to lay out limited powers to a conservator if later a director in a single-headed structure of a Federal Agency, promotes the arbitrary decision-making that aims at covering up the statutory provisions. Then, this “independence” brought by a single-headed structure in the FHFA raises a constitutionality issue, as a multi-member structure would mitigate it, because it requires the necessary consensus among different individuals, preventing the collusion of rogue Federal Agencies in an assault attempt on the ownership of private corporations and, in the meantime, the extortion of their resources.
With all of the above in mind, the Senior Preferred Stock Purchase Agreement (SPSPA), not only isn't a law, but in the covenant 5.3. "Conservatorship", the Conservator and the Treasury agreed to not uphold the FHEFSSA section 1367 (as amended by HERA) that contemplates the termination of the conservatorship through the Conservator's Power of recapitalization (soundness): "Put (restore) FnF in a sound and solvent condition", U.S. Code §4617(b)(2)(D), to weather future storms, because there's no other provision that would prompt the termination of the conservatorship established for Critically Undercapitalized enterprises. The return of the companies to the shareholders through the conservator's "rehabilitation" power, is what another Amicus Curiae, professor Vartanian, calls "the hallmark of the Conservatorship".
HERA restricts the Capital Distributions when FnF are undercapitalized (IN GENERAL), 12 U.S. Code §4614(e) (something omitted in all the lawsuits), with the exception (B): "to reduce the financial obligations with respect to ownership interest", that is, to repay the Senior Preferred Stocks -SPS-. The SPS aren’t debt obligations as the Solicitor General suggests in the brief, but obligations recorded as Equity and thus, affected by this restriction, as stipulated in the definition of Capital Distribution in the FHEFSSA: "any dividend with respect to any shares (common stock) of, or other ownership interest (JPS and SPS) in, an enterprise”. 12 U.S. Code §4502 (5).
The FHFA knows quite well this Restriction On Capital Distributions when FnF are undercapitalized. In July 2011 it approved a Final Rule that aimed to “clarify”, “seeking transparency” on when FnF can distribute Capital while in Conservatorship, echoing this provision and the definition of Capital Distributions in the FHEFSSA, and it knows that HERA bars the Capital Distributions. I will post another comment written by professor Vartanian, pertaining to this Final Rule because he even posts an excerpt from the rule:
FHFA also understood that depleting the Companies’ assets in the manner it later endorsed in the Net Worth Sweep would be incompatible with the statutory objective of rehabilitation: [A]llowing capital distributions to deplete the entity’s conservatorship assets would be inconsistent with the [conservator’s] statutory goals, as they would result in the removing of capital at a time when the Conservator is charged with rehabilitating the regulated entity. Conservatorship and Receivership, Final Rule, FHFA, 76 Fed. Reg. at 35,727 (emphasis added).
This Final Rule is the key. When the SPS were expected to be reduced (redeemed) soon under the exception (B) mentioned (I estimate it was in 2013 in the case of Freddie Mac and 2014 for Fannie Mae), in compliance with the second power of the conservator mentioned before (solvency in “put FnF in a sound and solvent condition”), the FHFA and the U.S. Treasury needed another exception that would allow the enterprises to continue to make Capital Distributions, otherwise the dividends would have had to come to a halt once the SPS were fully redeemed (repaid). That's why on July 2011 the FHFA approved this Final Rule and specifically, it laid out the 12 CFR 1237.12 about CAPITAL DISTRIBUTIONS WHILE IN CONSERVATORSHIP, that had a surprise: it added up another exception: (1) to recapitalize FnF ("to meet their Risk-Based Capital level"). Which is ill-conceived, as you can’t allow the distribution of Capital (Capital depletion) to build up Capital (recapitalization), because the recapitalization is achieved suspending that Capital distribution in the first place (Retained Earnings is Core Capital).
HERA allowed an unlimited dividend yield on the obligations temporarily authorized to purchase by the U.S. Treasury incorporated in their Charters, 12 U.S. Code §1719 (g)(1)(A), but, prior HERA, there was already in the Charter an Authorization Of Treasury To Purchase (Redeemable) Obligations, 12 U.S. Code §1719 (c), at a rate similar to Treasuries (limited to $2.25 billion set 40 years ago, so Congress just had to update it), subsection included as an exception to the Charter's provision "Fee Limitation", 12 U.S. Code §1719 (f), that bars the U.S. Government from levying a fee or charge on or with regard to the purchase, sale, issuance, guarantee, pledge of any mortgage, asset, obligation or other security by the corporations. That is, the U.S. Government can't profit from FnF's securities other that the small rate on obligations mentioned (c), because it isn't included (g) -unlimited yield- as an exception. This provision Fee Limitation is being currently violated with the TCCA fees and the fees allocated to two Housing Trust Funds managed by the Treasury and HUD for Affordable Housing matters.
This low cost Treasury backstop is what professor Nielson calls “special borrowing right from Treasury” and we wonder how a “right” that is the backbone of the Charter has been concealed or, better said, trampled.
First of all, we have to understand that FnF are Congressionally Chartered Private Corporations with a Public Mission (outlined in the Purposes section of the Charter. 12 U.S. Code §1716). There's no way a private corporation can be tasked with a Public Mission that makes them take on more credit risk, without some sort of backstop by the Government. This backstop is the aforementioned original Authorization Of Treasury To Purchase (Redeemable) Obligations.
The only way to make legal the Government's actions to some extent, because other felonies arise, like stock price manipulation, is considering the 10% and Net Worth Sweep (NWS) dividend as schemes of faster repayment of the SPS and recapitalization, according to the exceptions to the Restriction On Capital Distributions mentioned, because there's no fastest gear than a NWS dividend, as the prior 10% dividend made them report a loss, more draw requests to Treasury, increase of the SPS liquidation value and thus, a higher dividend the next quarter that prompted more losses, etc. A vicious circle or, what U.S. Officials said at the time: "death spiral and would never return to profitability". With a NWS dividend, FnF can’t pay a dividend above their quarterly profits. The shareholders love the NWS dividend, as part of, what is known as The Secret Plan of fast repayment of the obligations SPS and recapitalization of FnF, under the guise of dividend payments to Treasury. Notice that we are used to these Secret Plans by the FHFA. On August 5th, 2011, all of a sudden, the FHFA announced in a press release that the obligations with the taxpayers (1989 rescue fund “RefCorp”) of the other GSEs, the FHLBanks, had been “fully satisfied” thanks to the interest payments that the FHLBanks were required to make, equal to 20% of their Net Income, and announced their recapitalization plan, allocating the same amount as before, into a Retained Earnings account. Fannie Mae and Freddie Mac, were treated different by the same Agency, as it's the same plan of repayment of the obligations with the taxpayers first and later recapitalization, but FnF are carrying out both legs secretly, not only the first one like the FHLBanks.
The professor Nielson’s argument contending that the FHFA as Conservator wields limited Executive Power isn’t valid when acting as Regulator. HERA struck the section of the duties of the Director acting as regulator and inserted a new one, 12 USC 4513, adding up at the end a surprise: “(v) the activities of each regulated entity and the manner in which such regulated entity is operated are consistent with the public interest.” This is a “coercive” power that the professor Nielson dismisses when talking about the FHFA Director acting as conservator due to its limited Power, as this grants the Director limitless power with the excuse of acting in the public interest. The Director Calabria knows quite well this coercive power because he crafted the law HERA, in an interview published just after he was appointed:
His long term goals also include solidifying the respectful and cooperative relationships the GSEs have with the FHFA. “Some of it was the regulator didn’t have the tools they needed. The regulator wasn’t respected, not just by the entities but also by Congress.” He said. This has changed since the crisis. “I know it’s a lot harder to lock in culture in place that it is anything else, but I think it’s a critical part of what I’m going to try to achieve.” He said.
The tool to coerce the enterprises he might be thinking of, is the aforementioned new duty of the Director: the utilization of private corporations for public use, with activities or products not contemplated in their Charters. A limitless power that could be very dangerous in the hands of an ambitious Director in a single-headed structure of the FHFA.
For these reasons, the FHFA must be declared unconstitutional when acting as Regulator, and, due to its actions as Conservator, the Fanniegate scandal must be unwound, applying what is written in the statutes Charter Act and FHEFSSA that guide the Federal Agency.
The professor Nielson is right in everything related to the FHFA conservator, but errs when talking about the FHFA as regulator and this court must strike his assertion that the Petitioners only sue the FHFA as conservator. The FHFA as Regulator and its actions as conservator in a single-headed structure, must be addressed in this petition, as part of the debate over the constitutionality of the FHFA.
Respectufully submitted,
Carlos Vignote Sánchez
Freddie Mac shareholder
(This brief wasn't sent to a Law Firm for its submission IN SUPPORT OF THE COURT-APPOINTED AMICUS CURIAE, before the deadline on October 30th, as planned, after learning that it costs between $10,000 and $15,000)
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