An attack on the FHFA backfires on the Supreme Court.


In 2016, a group of wealthy investors filed a lawsuit to dislodge $ 124 billion from the U.S. Treasury and transfer some of the money to their own pockets. Investors have attacked the Federal Housing Finance Agency, a powerful executive agency that regulates Fannie Mae and Freddie Mac. Their plan was to force a settlement that would enrich shareholders by transferring billions of dollars to the mortgage giants and freeing them from government control.

It’s hard to overstate how much this ploy has turned against him. The Supreme Court on Wednesday upheld investors’ constitutional theory, then dismissed their efforts to claw back billions while deregulating the mortgage industry. In the process, they allowed President Joe Biden to appoint a new FHFA leader, a progressive who will keep Fannie Mae and Freddie Mac funneling money to government (instead of shareholders) indefinitely. The plaintiffs, in other words, did not just lose this case. They inadvertently defeated their ultimate goal, by entrenching the very system they attempted to overthrow.

The roots of Wednesday’s decision in Collins v. Yellen go back to the Great Recession. In 2008, as the US real estate market collapsed, Congress created the FHFA to regulate the mortgage industry. The agency has placed Fannie Mae and Freddie Mac under guardianship. As part of this arrangement, the government gave Fannie and Freddie billions of dollars in federal funds – basically a bailout – and received the money in return. Specifically, as part of a 2012 agreement with the FHFA, Fannie and Freddie sent quarterly payments made up of almost their total net worth to the US Treasury.

Not surprisingly, investors in Fannie and Freddie were unhappy with the deal. This forced the companies to give the government about $ 124 billion more than they would have done under previous agreements. And that left nothing for the private shareholders of the companies, who took legal action to recover the money they felt should have come back to them in the first place. The shareholders alleged that the FHFA had an unconstitutional structure because it was headed by a single director who the president cannot dismiss without cause. This structure, they argued, violates the constitutional separation of powers by depriving the president of executive control. And, they thought, the solution is to invalidate the agency’s actions, namely the 2012 deal that sent $ 124 billion to the US treasury.

Biden quickly took advantage of the Supreme Court ruling decision.

This step would have detonated a bomb in the housing market, throwing the mortgage sector in chaos while forcing the government to somehow unravel years of billion dollar transactions. It may also have prompted the Biden administration to adjust with the plaintiffs to avoid this disaster. Shareholders seemed eager to leverage a decision in their favor to end Fannie and Freddie’s tutelage once and for all.

On Wednesday, the Supreme Court went in a very different direction. By a vote of 7-2, the court agreed that the job protections of the director of the FHFA violated the Constitution. This result was not a surprise: again last year, the court ruled that the president must be able to dismiss the head of a single-director federal agency; that decision dictated the outcome here. By a vote of 8-1, however, the court rejected the plaintiffs’ theory that the Director’s actions are void because he is unconstitutionally protected from dismissal. (Only Judge Neil Gorsuch sided with the plaintiffs on this issue.)

As Judge Samuel Alito wrote in his majority opinion, the argument for radical redress “is neither logical nor backed by precedent”. The director of the FHFA was “correctly appointed”, so “there is no basis for concluding” that he “did not have the authority to perform the functions of the office”. As a result, the courts do not have the power to overrule its decisions, including the 2012 agreement at issue in Collins. Simply put, the Treasury doesn’t have to return the money – and so, by extension, the shareholders get nothing. (Technically, Alito left open the possibility of limited compensation if plaintiffs could prove that the president tried and failed to remove the director of the FHFA. But no president did such a thing, and like judges Elena Kagan and Clarence Thomas explained in separate opinions, such a claim will fail.)

Here’s where the Supreme Court left it in a nutshell: The FHFA stands. Fannie and Freddie remain under guardianship, still on a leash by the government, and the Treasury can keep the billions it has collected from them. Meanwhile, the shareholders, who have pursued this business for five years, get nothing. Nothing, that is, except the satisfaction of the Supreme Court granting the president the power to fire the director of the FHFA.

But this result will not satisfy shareholders at all, because it leaves them in a worse situation than before. From 2019 to this week, the FHFA was led by Mark Calabria, a libertarian candidate for Donald Trump whose term was to run until 2024. Calabria intended to free Fannie and Freddie trusteeship, freeing companies from strict government control, ending their transfer of money to the treasury and allowing them to start lining the pockets of investors again. This goal angry Democrats, as the Trusteeship pursues many progressive goals, including affordable housing and racial equity. Due to her protection from dismissal, Calabria was to remain in office for an additional three years and terminate trusteeship at the end of her term.

Thanks to Collins, however, Calabria lost this protection. And Biden quickly took advantage of the Supreme Court ruling: he requested and received Calabria’s resignation within hours, then replaced him with a new acting director, Sandra L. Thompson, a liberal who joined the FHFA under President Barack Obama. (She is the first woman to run the agency.) Thompson promptly ad its intention to continue to regulate Fannie and Freddie, and to focus on “affordable housing and access to credit, especially in communities of color”. It’s clear she has no intention of releasing the companies from tutelage, and it’s a safe bet that Biden’s eventual candidate to replace her won’t either.

If Fannie and Freddie’s investors hadn’t filed a lawsuit, they might have achieved their ultimate goal: Calabria would likely have remained in power until 2024, dismantled trusteeship, and restored the flow of funds to shareholders. (For better or worse, Biden doesn’t seem willing to fire Trump with job protections until a court allows him to.) Instead, these investors are in the worst possible position. They won’t get a dime out of the $ 124 billion they’re looking for, and Fannie and Freddie will remain in wardship for the foreseeable future. Their ally, Calabria, has come out, replaced by a progressive chosen by Biden who will pursue policies they hate. the Collins the plaintiffs didn’t just lose: they accidentally handed the Democrats a major victory that no Democrat was even trying to achieve.

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