Collins v. Mnuchin and GSE Privatization
FHFA Director Mark Calabria has pushed to privatize the two government-sponsored enterprises, Fannie Mae and Freddie Mac, which were taken over by the Treasury Department during the bailout of 2008. Twelve years later, the government continues to operate the two companies under conservatorship and sweeps all net profits to the Treasury general fund every year instead of allowing the firms to issue dividends to their shareholders.
Treasury Secretary Steve Mnuchin has indicated he is reluctant to agree to privatize Fannie and Freddie before President Trump’s term is over on January 20, 2021. It is unclear what he is waiting for. The two companies remain under government control twelve years after the bailout of 2008 and years after other similarly bailed out firms have exited government ownership.
A legal challenge to the government’s actions in sweeping GSE profits and stopping dividends threatens to completely upend the government’s oversight of the two firms. During the oral argument before the Supreme Court in Collins v. Mnuchin, the Justices’ questions indicated skepticism of the government’s power to institute dividend restrictions and doubts about the independence of the FHFA Director who regulates these companies.
The government argued that plaintiffs don’t have standing to challenge the denial of dividends on the grounds that such a challenge would be a derivative claim, and thereby a claim belonging to the corporation that the FHFA Director should control as conservator. Justice Sotomayor and Chief Justice Roberts, among others, questioned that logic, as these claims were unique to a particular class of shareholders and thereby direct claims for which shareholders should have standing. In my corporate law class, the Justices would get an A+ for their adroit understanding of corporation law.
The Justices asked tough questions about other aspects of the case, including whether the government’s action was excessive and whether the FHFA Director position was unlawfully insulated in the statute creating the FHFA. The overall tone from all the Justices at oral argument suggests that the odds look grim for the government. Shares in Fannie Mae jumped roughly 10% just after oral argument.
If Secretary Mnuchin acts now to support the FHFA Director’s efforts to privatize the GSEs, and renders the pending SCOTUS decision largely moot, he can ensure that the GSEs exit government ownership on terms determined by Treasury and the FHFA—terms designed to ensure the financial crisis of 2008 does not recur. Otherwise, a loss at SCOTUS might allow the GSEs to effectively neuter the terms of the government’s conservatorship.