Collins v. Mnuchin and GSE Privatization
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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.
Associate Professor of Law, Antonin Scalia Law School, George Mason University
Associate Professor of Law J.W. Verret joined the Antonin Scalia Law School, George Mason University faculty in 2008. In 2013, he took leave for two years to serve as the Chief Economist and Senior Counsel for the U.S. House Committee on Financial Services. He received his JD and MA in Public Policy from Harvard Law School and the Harvard Kennedy School of Government, respectively, in 2006. While in law school, Professor Verret served an Olin Fellowship in Law and Economics at the Harvard Program on Corporate Governance under the guidance of Prof. Lucian Bebchuk.
Professor Verret then served as a law clerk for Vice-Chancellor John W. Noble of the Delaware Court of Chancery. Prior to joining the faculty at Scalia Law, Professor Verret was an associate in the SEC Enforcement Defense Practice Group at Skadden, Arps in Washington, D.C. He has written extensively on corporate law topics, including Delaware's Guidance, co-written with Chief Justice Myron T. Steele of the Delaware Supreme Court. His academic work has been featured in the Yale Journal on Regulation, The Business Lawyer, the Delaware Journal of Corporate Law, the Stanford Law Review, the University of Pennsylvania Journal of Business Law, and the Virginia Law and Business Review. Professor Verret was selected by the Northwestern Law School Searle Center on Law, Regulation, and Economic Growth for a 2009-2010 Searle-Kaufmann Research Fellowship.
Professor Verret is also a Senior Scholar at the Mercatus Center Working Group on Financial Markets, where he regularly briefs Congressional staff, members of Congress, SEC Commissioners and other financial regulatory agencies on financial regulation topics. He also directs the Corporate Federalism Initiative, where he obtains research grants for a network of students and faculty scholars who study the division between states and the federal government as sources of corporate law. Professor Verret has been invited to testify before various House and Senate Committees four times during the financial crisis of 2009 regarding all of the central provisions of the Obama Administration's 2009 financial regulatory reform proposals. For a full list of Professor Verret's C-Span appearances, including testimony before the U.S. House of Representatives and the U.S. Senate, see http://www.c-spanvideo.org/jwverret.
Professor Verret has been an invited panelist for various television appearances, including an interview on The NewsHour with Jim Lehrer. Professor Verret has been quoted in various media on financial regulation and corporate law topics, including the New York Times, CNN Money, the CNN Political Ticker, CNBC, ABC News, Investor's Business Daily, ESPN.com, The American Banker, The American Lawyer, The Huffington Post, CBS.com, and AP News. Professor Verret's op-eds have been featured in Forbes, The Chicago Tribune, The Orange County Register, and The Wall Street Journal. Professor Verret is also a regular guest contributor to three of the most noted corporate law and financial regulation law blogs: the Harvard Law School Corporate Governance and Financial Regulation Forum, Deallawyers.com, and The Conglomerate.