Investors Unite Files Amicus Brief In Support of Perry Capital Appeal of U.S. District Ruling

 Investors Unite filed an amicus brief in support of Perry Capital’s appeal of the U.S. District Court ruling on the Third Amendment Sweep. The brief, offered on behalf of IU’s over 1,100 members, argues the Third Amendment Sweep supplants federal law with an interagency agreement. You can find a link to the brief here.

The arguments will be familiar to you: The Federal Housing Finance Agency acted outside of the authority granted to it by the Housing and Economic Reform Act as conservator. Further, the brief discusses the statutory protections afforded to shareholders and notes that the Third Amendment is “inconsistent with HERA’s requirement that a conservator be conducted with the goal of restoring the companies to “’sound and solvent conditions.’” The Third Amendment, of course, is draining away the financial life of Fannie Mae and Freddie Mac and, as the brief states, actually ensures that neither company will “be able to rebuild any buffer against inevitable future losses.”

It’s worth noting that IU’s counsel is Michael Krimminger, who served in senior positions at the FDIC for more than 20 years, including general counsel. Mr. Krimminger was intimately involved in the drafting of HERA and thus knows better than most both the spirit and letter of that law. In creating FHFA as a conservator, the intent was not to create a long-term arrangement in which the GSEs would be forced to turn over every single penny to the U.S. Treasury. FHFA is wildly out of compliance with HERA, and the brief forcefully states:

“To return to compliance with HERA, either the Third Amendment should be vacated to permit rehabilitation or FHFA should place the Companies into receivership as required by HERA and ultimately make distributions to stakeholders, including the members of Investors Unite.”   

The brief goes after the U.S. District Court’s “erroneous conclusion” that the Third Amendment is, in any way, grounded in law or is consistent with what is required of FHFA as a conservator. What’s interesting is that HERA makes clear that should the companies become insolvent or otherwise unable to pay their debts then FHFA “shall” liquidate them. The Third Amendment, of course, is causing the companies to move toward insolvency by denying them the chance to build up their capital reserves.

Another amicus brief filed by the Independent Community Bankers of America, the Association of Mortgage Investors, former FDIC Chairman William Isaac and banking regulation expert Robert Hartheimer, whom the brief notes, have “common interest in the potentially far-reaching adverse precedent this case may set for the stakeholders of future receiverships and conservatorships of depository institutions undertaken by the [FDIC].” This brief focuses on the conservatorship, due process and investor expectations, and wastes no time in lambasting the District Court’s ruling:

“Its opinion serves as a roadmap for government overreach and unreviewable disregard of property rights and state corporate law. At a minimum, the decision will make capital more expensive – perhaps prohibitively so in times of stress – for all regulated or systemically important financial institutions, not just for the GSEs.”

It also quickly gets into its arguments on investor expectations:

“The district court appears to reason that while investors and creditors enjoy contractual and shareholder rights prior to conservatorship, those property rights are somehow ‘extinguished’ during conservatorship. But it is well established that an FDIC conservatorship does not extinguish property rights. The Supreme Court in O’Melveny & Myers v FDIC established that a receiver merely steps into the shoes of the entity for which it acts and succeeds to all director and management rights of the entity – a principle that applies equally to a conservator.”

ValueWalk has a good roundup of all the amicus briefs that have been filed for those interested in taking a look.