All Is Not Lost for Fannie and Freddie Shareholders

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The Supreme Court almost put an end to the extended litigation about the takeover of Fannie Mae and Freddie Mac by a conservator — but it didn’t destroy shareholders’ hopes altogether.

In an opinion that was nearly unanimous, the justices definitively rejected the companies’ shareholders’ claim that the Federal Housing Finance Agency had gone beyond its powers as conservator when it agreed to a Treasury Department takeover of the federally backed home mortgage companies and conducted the “net worth sweep” that transferred the companies’ assets to Treasury in 2012.

But the court also said that it was unconstitutional for the FHFA director to be insulated from presidential authority by a provision that said the director could only be fired for cause. That holding kept the shareholders hopes alive, at least a little.

The court explained that the original net-worth sweep was constitutionally legitimate because it happened under the auspices of an acting director who could be fired by the president. The court nonetheless left a window for the shareholders to argue before the lower court that later FHFA actions implementing the sweep might be illegitimate if they could prove that those actions would not have taken place had the president been able to fire the FHFA director. That issue will go back to the lower courts.

Overall, the court’s decision was notably more moderate than the one reached by the U.S. Court of Appeals for the Fifth Circuit. There, as I explained back in 2019, the appellate judges used two separate conservative lines of judicial thought to decide the case in favor of the shareholders.

The appeals court’s first line — now rejected clearly by the Supreme Court — insisted that FHFA had gone beyond its legitimate authority as a conservator in performing the net-worth sweep. Had the justices upheld this holding, it would have marked a watershed in administrative law, which normally affords agencies considerable latitude in performing the functions assigned to them by statute.

Justice Samuel Alito’s opinion for the court rejected that approach. It noted that, in creating FHFA, Congress expressly said that the courts could not interfere with the agency’s powers as conservator. And Alito reasoned, correctly, that the sweep was part of the agency’s conservatorship powers, designed as it was to serve the public interest that FHFA was created to advance.

This part of the decision can be understood as a message to the lower federal courts not to ignore ordinary principles of administrative and statutory law to overturn government action that they might not like as a matter of policy.

When it came to the other line of conservative judicial thought, however, the court embraced the idea that the Constitution precludes Congress from creating new independent agencies run by a single head who is insulated from being fired by the president. In the leading precedent, decided in 2020, the conservative justices struck down the protections Congress created for the director of the Consumer Finance Protection Bureau.

The FHFA director’s protections were less extensive, but the court said that even they went too far. This conclusion has broader constitutional ramifications. It consolidates the conservative doctrine that disfavors the creation of new independent agencies run by a single agency head.

The twist in the case came on the question of what it meant for the shareholders that the FHFA head was unconstitutionally protected from being fired. Here, the court dealt the shareholders a devastating blow by concluding that its holding didn’t apply to the original net-worth sweep, which took place under an acting director who wasn’t insulated from being fired. Ordinarily, you would have expected this conclusion to end the litigation.

Yet the court went on to say that the shareholders did have one final arrow left in their quiver. It said they could go back to the lower courts to seek reversal of steps that permanent directors of FHFA took in carrying out the net-worth sweep. The court’s logic was that actions by an unconstitutionally insulated director could be reversed by the courts if the courts find that the actions wouldn’t have taken place if the president at the time would have intervened to fire the director.

It will not be easy for the lower courts to apply this newly created test of whether past events would have been different had a president sought to fire an unconstitutionally protected officer. And the court said that the situation was not “clear cut” in the case.

Yet the court did enable the shareholders to fight another day. The saga of the hedge fund managers and the federal courts is not yet over.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Feldman is a Bloomberg Opinion columnist and host of the podcast “Deep Background.” He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”

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