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From Securities Regulation Daily, October 20, 2017

Petition asks whether judges can review Treasury's claim to Fannie/Freddie's net worth

By R. Jason Howard, J.D.

Perry Capital LLC, for and on behalf of investment funds for which it acts as investment manager, has filed a petition for a writ of certiorari to review the judgment of the United States Court of Appeals for the District of Columbia concerning the Treasury Department’s "Net Worth Sweep" of Fannie Mae and Freddie Mac (Perry Capital LLC v. Mnuchin, October 16, 2016).

Net Worth Sweep. Fannie Mae and Freddie Mac were placed in conservatorship during the 2008 financial crisis by the Federal Housing Finance Agency (FHFA). Nearly four years later, FHFA, acting as conservator to the companies, "agreed to surrender each company’s net worth to the Treasury Department every quarter." The arrangement is referred to as the "Net Worth Sweep" and it "replaced a fixed-rate dividend to Treasury that was tied to Treasury’s purchase of senior preferred stock in the companies during the crisis."

The petitioners contend that the use of the Net Worth Sweep has allowed the Treasury Department to seize $130 billion more than it was entitled to receive under the pre-2012 arrangement. As intended, the petition states, "these massive capital outflows have brought the Companies to the edge of insolvency," all but guaranteeing that Fannie and Freddie will never exit FHFA’s conservatorship.

The petitioners challenged the Net Worth Sweep as exceeding both FHFA’s and Treasury’s respective statutory powers, but the appeals court held that the Net Worth Sweep was within FHFA’s statutory authority and that keeping Treasury within the boundaries of its statutory mandate would impermissibly intrude on FHFA’s authority as conservator.

If the appeals court decision stands, the FDIC as conservator could seize depositor funds from one bank and give them to another institution as equity or to the Treasury, or even to itself, as long as it is not liquidating the bank, according to the petition.

The petitioners contend that the "notion that the law permits a regulator appointed as conservator to act in a way so manifestly contrary to the interests of its conservatee is deeply destabilizing to our financial system."

Under the appeals court’s decision, the petitioner’s contend, FHFA’s effective immunity from judicial review could spread so that other agencies "may avoid judicial review so long as the government can claim that reviewing the other agency’s action would ‘affect’ FHFA’s actions as conservator."

Question presented. The question the petition presents is whether 12 U.S.C. § 4617(f), which prohibits courts from issuing injunctions that restrain or affect the exercise of powers or functions of the FHFA as conservator bars judicial review of an action by FHFA and the Department of Treasury to seize for Treasury the net worth of Fannie Mae and Freddie Mac in perpetuity.

The petition asserts that the "Court should grant the petition to decide whether Congress intended to empower conservators to act in this unprecedented and dangerous way."

The case is No. 17-580.

Attorneys: Theodore B. Olson (Gibson Dunn & Crutcher LLP) for Perry Capital LLC. Noel J. Francisco, U.S. Department of Justice, for Steven T. Mnuchin.

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