[00:00:03] Speaker 00:
Here's number 14-5243 at L, Perry Capital LLC for and on behalf of investment funds for which it acts as investment manager appellant versus Jacob J. Lew and his official capacity as the Secretary of the Department of the Treasury at L. Mr. Alston, Institute for Institutional Plaintiffs, Perry Capital LLC at L. Mr. Hume for Class Plaintiffs, Mr. Kane for FHFA, and Mr. Stern for Jacob J. Lew.

[00:00:33] Speaker 03:
Good morning, Mr. Olson.

[00:00:34] Speaker 05:
Good morning, Your Honor.

[00:00:35] Speaker 05:
May it please the court?

[00:00:37] Speaker 05:
The net worth sweep, which is at the center of this case, was a massive, we submit, lawless government expropriation of Fannie Mae and Freddie Mac, two publicly held companies, pretending to act as a conservator, which is required by law to conserve and preserve the assets and rehabilitate these companies to a sound and solvent condition.

[00:01:05] Speaker 05:
The Net Worth Sweep, and the name really says it all, Net Worth Sweep, systematically drained these entities of all value, leaving in its wake two unsound and insolvent zombies, a golden goose for the Treasury and utterly worthless for the individuals and institutions who in good faith invested in them.

[00:01:33] Speaker 05:
If private individuals, we submit, had done this to public companies, what the United States Government has done here, the SEC, the Justice Department would be investigating and perhaps prosecuting.

[00:01:47] Speaker 05:
In September of 2008, the FHA named itself the Conservator of Fannie and Freddie.

[00:01:56] Speaker 05:
Under the statute pursuant to which it acted, it was required to preserve the assets, conserve the situation of those companies, and put each in a sound and solid condition and rehabilitate them.

[00:02:11] Speaker 05:
That is in the statute pursuant to which the FHFA purported to act.

[00:02:16] Speaker 05:
And in its regulations, which have been cited in the brief,

[00:02:20] Speaker 05:
The agency describes the primary objective, the essential function, and the statutory charge of a conservator is to keep the enterprise going and bring it back to life to the extent that it needs resuscitation.

[00:02:39] Speaker 05:
A conservator is, under the statute, under the regulations, under the same statute, the FDIA that governs the FDIC, and decades of tradition and common law, a conservator is a trustee for the assets of its ward.

[00:02:59] Speaker 05:
It has responsibility to retain the rights of the institution that it's protecting, and when this

[00:03:08] Speaker 05:
conservatorship was created.

[00:03:10] Speaker 05:
The FHH8 put out a press release with questions and answers describing what its role would be.

[00:03:18] Speaker 05:
This is at pages 2441 through 2443 of the Joint Appendix.

[00:03:26] Speaker 05:
It answers these same questions about conserving and preserving and sound and solvent.

[00:03:32] Speaker 05:
And under a conservatorship, it says the company is not liquidated.

[00:03:37] Speaker 05:
There are no plans to liquidate the company.

[00:03:40] Speaker 05:
And the stockholders' rights, the company, the stockholders will retain their financial worth in the institution.

[00:03:49] Speaker 05:
Then a few years later, on August 17, 2012, the net worth sweep was announced.

[00:03:58] Speaker 05:
And it did exactly the opposite of what a conservator is responsible by law, tradition, and regulation to do.

[00:04:08] Speaker 05:
It basically decided to wipe out all the value of Fannie and Freddie and make them wards of the state.

[00:04:16] Speaker 07:
What was the stock selling for at that point?

[00:04:18] Speaker 05:
The price of the stock, I don't know the answer to that.

[00:04:21] Speaker 05:
I don't know, I'm not even sure whether it's in the briefs.

[00:04:25] Speaker 05:
I'm not sure, I would argue that it wouldn't be relevant.

[00:04:29] Speaker 05:
The institutions unquestionably have been in difficult straits, but the record is now clear, and it has been clear for quite some time, that the entities have turned the corner and we're moving towards a profitable position.

[00:04:44] Speaker 11:
Is that accurate?

[00:04:46] Speaker 11:
You talk about 2013.

[00:04:47] Speaker 11:
My understanding is that their profits have gone down markedly and that at least Freddie Mac has been losing money again.

[00:04:55] Speaker 11:
Is that accurate or inaccurate?

[00:04:57] Speaker 05:
What I understand the case to be is that the institutions are, because of the deferred tax assets,

[00:05:03] Speaker 05:
that have been put in place, that the entities have both produced and returned to the Treasury over $50 billion of the amounts that the Treasury has put into it.

[00:05:14] Speaker 11:
There was a big amount of money in 2013.

[00:05:18] Speaker 11:
But 2014, 2015, after those tax credits were taken out of the picture, they've been back in this position where

[00:05:27] Speaker 11:
The amount of profits that they're making may or may not fluctuate above or below the amount of dividend that they would owe to Treasury each year.

[00:05:37] Speaker 11:
In fact, Freddie Mac lost money in the third quarter of 2015.

[00:05:40] Speaker 05:
The dividends could have been paid in kind, which is something that our opponents overlook.

[00:05:46] Speaker 05:
That would have increased the liquidation preference, but it would have preserved the capital of the institution.

[00:05:53] Speaker 11:
Well, surely that decision, whether to require dividends in cash or in kind, is exactly the type of judgment that's going to be conferred on the agency as conservator and that we couldn't superintend.

[00:06:06] Speaker 05:
Would you agree with that?

[00:06:07] Speaker 05:
But what we're talking about here is the...

[00:06:09] Speaker 05:
would you agree that we certainly couldn't say we couldn't say the conservator erred and enjoined them or a declaratory judgment they should have liquidation rather than preference rather than we should mention that what they were is making a mistake because they were taking they were assuming because of the cat 10% cash dividend that that would impair the capital of the institutions

[00:06:30] Speaker 05:
And we drive them further towards insolvency.

[00:06:34] Speaker 05:
That was not necessary.

[00:06:36] Speaker 07:
They were inferring that from the pattern of continued losses.

[00:06:39] Speaker 07:
And I think twice, maybe more times, in which the GSEs borrowed the money simply to pay it back as a dividend.

[00:06:49] Speaker 05:
Well, the payment of a 10% dividend did not have to be done.

[00:06:53] Speaker 05:
It's not a cash dividend.

[00:06:56] Speaker 07:
Judge Muller just covered that with you.

[00:06:58] Speaker 05:
That's true, but that's a discretionary decision that hardly... If that discretionary decision was being used to act in a way that a conservator does not act, then there is the right of this court under the APA and under circumstances to take judicial review of the fact that the statute required

[00:07:21] Speaker 05:
the conservator to do one set of things, and the network sweep does precisely the opposite.

[00:07:29] Speaker 07:
Let me take you back a moment.

[00:07:30] Speaker 07:
You made reference to the potential realization of the tax benefits.

[00:07:35] Speaker 07:
Now, it's not entirely clear to me.

[00:07:39] Speaker 07:
It looks like the tax benefit here is essentially a loss carry forward.

[00:07:42] Speaker 07:
Is that right?

[00:07:43] Speaker 05:
Yes, so that's one way of putting it.

[00:07:45] Speaker 07:
So if the agency, if the GSEs are going to continue to realize losses,

[00:07:50] Speaker 07:
they will not be in a position to get the benefit of the... Well, that's only a benefit up to a point.

[00:07:58] Speaker 05:
What the government did was prevent the agencies, the entities from utilizing that.

[00:08:03] Speaker 07:
So I want to put ourselves in the position of the FHFA just prior to the third amendment.

[00:08:13] Speaker 07:
And at that point, as I understand it, the GSEs have been pretty consistently losing money.

[00:08:23] Speaker 07:
The prospect of realizing anything on the tax credits, because there will be profitable quarters in the projected future, is looking like 2013, 2014, somewhere in that range.

[00:08:36] Speaker 07:
There's a handwritten note on a document suggesting, a Treasury document suggesting that.

[00:08:41] Speaker 05:
Well, the record is fairly substantial, especially in conjunction with the recently unsealed documents that were made available to us just recently that the former ex-CFO

[00:08:54] Speaker 05:
McFarland, O'Fannie specifically said there was likelihood of $50 billion profits at the end of the year.

[00:09:04] Speaker 05:
The testimony is that the corner had been turned because the housing market had been turned, and at that point... That was the GSE's estimate, not Treasury's.

[00:09:12] Speaker 07:
Treasury had a very pessimistic view of this throughout the whole period.

[00:09:17] Speaker 05:
That is, the record pretty much was the Grant Thornton, which was an expert for the Treasury Department, said that karma has been turned.

[00:09:29] Speaker 07:
What we submit... Well, Grant Thornton gave them a very...

[00:09:35] Speaker 07:
pessimistic outlook for the long term.

[00:09:39] Speaker 05:
But during that, right immediately and around the time, these documents make it clear that at the time, shortly before the decision was made, which was made in 2012, in August, McFarland said that she gives the report to the Treasury Department, says the corner has been turned, there's a profitable prospect ahead.

[00:10:04] Speaker 07:
Let me quote her.

[00:10:05] Speaker 07:
on that, because she didn't say, I said it.

[00:10:07] Speaker 07:
She said, I would have said that.

[00:10:08] Speaker 07:
She's trying to recall what happened at this meeting some couple of years earlier.

[00:10:14] Speaker 07:
She said, well, I would have mentioned that.

[00:10:16] Speaker 05:
Well, I think the record is more clear than that, Judge Ginsburg.

[00:10:20] Speaker 05:
And I think what the record supports the proposition that the Treasury, at that point, seeing what other people were being able to see, including investors, that these institutions have turned the corner, and if they had been not

[00:10:34] Speaker 05:
eliminated from the possibility of ever being solved by a network sweep.

[00:10:40] Speaker 05:
That was, the institutions had to turn profitable.

[00:10:43] Speaker 11:
I think what you're talking about seeing is there was a short term and a long term problem and there were competing views it looks like within the government about what these prospects were and reality has confirmed that and a lot of what folks were talking about was the short term profits that would be made when they carried forward that

[00:11:02] Speaker 11:
and were able to take advantage of that tax benefit, which has done, has expired at this point.

[00:11:07] Speaker 11:
And they now, the concern as a conservator was if you have this cycle of drawing money to pay dividends from the right pocket and putting it back into the left pocket, it was going to increase, continue the problem.

[00:11:22] Speaker 05:
This is not what a conservative is required by law to do.

[00:11:25] Speaker 11:
And the Treasury... It's not what's required by law.

[00:11:27] Speaker 11:
It's a conservative permitted by law to say the scheme that is in place under the PSPAs and the First and Second Amendment isn't going to work in the long term.

[00:11:35] Speaker 11:
It's only going to increase the amount of money that they owe.

[00:11:39] Speaker 11:
They're going to keep, like I said, taking money, borrowing money just to pay us back money.

[00:11:44] Speaker 11:
And instead we need to come up with a new solution.

[00:11:46] Speaker 11:
And that new solution

[00:11:48] Speaker 11:
says you will give us all those profits, whatever they are, if they're zero, we get nothing for the money that we're loaning you and the risk that we're exposed to.

[00:11:57] Speaker 11:
And if they're less than our $19 billion dividend, we will have to suffer that loss.

[00:12:02] Speaker 11:
But if it's more, we will get the benefit of it.

[00:12:06] Speaker 11:
How is that not within the discretion of a conservator?

[00:12:10] Speaker 05:
I want to answer that.

[00:12:11] Speaker 05:
I want to make sure that I reserve the time that I was hoping to reserve for rebuttal.

[00:12:16] Speaker 05:
The answer is that to the extent that the decision was made at that time, and we submit the decision was made at that time by the Treasury Department, we can use this to deal with our budget concerns.

[00:12:27] Speaker 05:
and that they, at that point, stopped being a conservator.

[00:12:32] Speaker 05:
The Treasury Department's release, by the way, the FHA decision was supposed to be made without the supervision or direction of the Treasury Department.

[00:12:41] Speaker 05:
The announcements that were made at the time make it clear that the Treasury Department was directing what the FHA was doing at the time.

[00:12:49] Speaker 05:
They specifically said, this is going to expedite the wind down of Betty and Fannie, and we're going to now,

[00:12:57] Speaker 05:
and make sure that the institutions can be liquidated.

[00:13:02] Speaker 05:
So what they were doing was changing.

[00:13:04] Speaker 11:
See, I think as I read the record, it's more complicated and nuanced than that, and that is that an awful lot of folks, both on Capitol Hill and within the executive branch, think that we cannot go back to the pre-2008 situation here.

[00:13:18] Speaker 11:
But we as FHFA, we're not the ones to make that call, nor is Treasury by itself.

[00:13:25] Speaker 11:
And so what we will do, we do not,

[00:13:27] Speaker 11:
want to liquidate these two entities, that would be extraordinarily damaging to the economy.

[00:13:33] Speaker 11:
We're going to hold them.

[00:13:35] Speaker 11:
Instead, we're going to keep things in a stable condition until the policy makers make a decision.

[00:13:41] Speaker 05:
What's wrong with that?

[00:13:42] Speaker 05:
That's not sound and solvent.

[00:13:44] Speaker 05:
The statute requires keeping institutions sound and solvent.

[00:13:47] Speaker 11:
You're telling me they're making all this money.

[00:13:48] Speaker 11:
That sounds like the definition of sound and solvent.

[00:13:51] Speaker 05:
Not if the conservator, which is supposed to be acting as a trustee,

[00:13:56] Speaker 05:
a fiduciary, a fiduciary entity decides I will take all of the profits and give it to the treasury.

[00:14:03] Speaker 11:
A fiduciary to whom?

[00:14:04] Speaker 11:
Because this statute is different.

[00:14:05] Speaker 11:
It doesn't say a fiduciary to stockholders.

[00:14:08] Speaker 11:
It's a fiduciary serving the best interests of the entity

[00:14:12] Speaker 11:
or the agency.

[00:14:14] Speaker 05:
Now, I submit that that reference, which is under incidental powers in the statute itself, doesn't provide a conservator to act in its own best interest or in the interest of someone.

[00:14:27] Speaker 11:
What does it mean?

[00:14:27] Speaker 11:
What does it mean if it doesn't say they can't take something in the interest of the agency?

[00:14:32] Speaker 11:
I think the FDIC has the same leverage.

[00:14:33] Speaker 05:
Well, it can swallow up all of the responsibilities that conservatives have had for centuries.

[00:14:38] Speaker 07:
Well, it does.

[00:14:39] Speaker 07:
This is a statute that reads out the fiduciary duty by that provision.

[00:14:43] Speaker 05:
I submit that it does not, Judge Ginsburg, and I think that would be an error if the court came to the conclusion that that reference in incidental powers, which is also in the FDIA, would allow the conservator, who is supposed to bring, according to the statute, conserve and preserve and sound and solvent, and rehabilitate the agency, it would swallow up all of his words.

[00:15:08] Speaker 07:
Suppose the FDIA is facing a

[00:15:10] Speaker 07:
a troubled bank of enormous proportions, one of the largest banks in the country, and it says we could, we're acting as conservator here, we could perform the ordinary duties of a conservator, but it would so impair the reserves of the FDIC that it would be a danger to all of the other insured depositors around the country.

[00:15:37] Speaker 07:
And so we're going to act to a degree in our own interest.

[00:15:42] Speaker 07:
rather than solely in the interest of the Troubled Institute.

[00:15:45] Speaker 05:
At that point, I think if you read the statute as a whole, and if you look at the way the FDIA and the FDIC have operated all these many years, that there's a choice then to decide to move to a position of a receivership and then wind down the entity, which is what Treasury said it was going to do.

[00:16:03] Speaker 07:
Well, they are.

[00:16:04] Speaker 07:
That's right.

[00:16:05] Speaker 07:
And they're still in their capacities as conservatives.

[00:16:06] Speaker 07:
They haven't yet pulled the trigger as a liquidator, right?

[00:16:09] Speaker 05:
Well, they're pulling the trigger, but they're not admitting it.

[00:16:12] Speaker 05:
They're still supposed to be acting as a conservator.

[00:16:16] Speaker 07:
And then they decide, no, we're going to take it.

[00:16:17] Speaker 07:
Let me just go back.

[00:16:18] Speaker 07:
I have your point.

[00:16:20] Speaker 07:
Just go back a moment to what Dr. Millett was saying about the somewhat conflicting views of the long-term outlook.

[00:16:28] Speaker 07:
I think there was consensus that there would be a lot of fluctuation volatility over any period of time for the GSEs.

[00:16:35] Speaker 07:
But the, what's the date of the third amendment, the 17th?

[00:16:40] Speaker 05:
August 17th, 2012.

[00:16:42] Speaker 07:
So on the 8th, that's the 8th of August, the two GSEs, the 9th, issued, one's on the 8th, one's on the 9th, there are 10 cues.

[00:16:56] Speaker 07:
And the 10 cues say we do not expect to generate net income or comprehensive income in excess of our annual dividend obligation to the Treasury over the long term.

[00:17:05] Speaker 07:
We also expect that over time our dividend obligation to Treasury will increasingly drive our future draws under the Senior Preferred Stock Purchase Agreement.

[00:17:13] Speaker 07:
So a week before, whatever it is, 10 days before the trigger is pulled, both of the GSEs go out with their 10 cues and say, we have no future.

[00:17:23] Speaker 05:
And at the same time, and it's reinforced by the documents that were recently unsealed, that there were projections, because of the deferred tax assets and the availability, they were soon to be released, would make a completely different picture.

[00:17:39] Speaker 05:
It's not a coincidence.

[00:17:40] Speaker 11:
A completely different picture for how long?

[00:17:42] Speaker 05:
for the foreseeable future.

[00:17:48] Speaker 05:
These entities have returned $50 billion to the Treasury more than the Treasury put into these institutions.

[00:17:56] Speaker 05:
And the other thing is that what was done at the network sweep... It doesn't necessarily mean more.

[00:18:02] Speaker 07:
It's just $50 billion toward the commitment, towards paying down the commitment.

[00:18:08] Speaker 05:
the commitment, the amount that has been returned,

[00:18:15] Speaker 05:
exceeds by $50 billion.

[00:18:17] Speaker 07:
As of now, is that what you're saying?

[00:18:19] Speaker 05:
That's $58 billion, I think.

[00:18:21] Speaker 07:
So that's post-record, but fair enough.

[00:18:23] Speaker 07:
Yes, I think that it's in a... But the only optimistic scenario here is what McFarland relates, correct?

[00:18:31] Speaker 05:
No, I believe that.

[00:18:32] Speaker 05:
If you look at the Ugoletti deposition, the Jeff Foster, who's a Treasury official... The Ugoletti takes us to an interesting point.

[00:18:42] Speaker 07:
Are you still maintaining that the record was inadequate before the district?

[00:18:46] Speaker 05:
Absolutely.

[00:18:47] Speaker 05:
The record was inadequate was not only inadequate, it was misleading.

[00:18:50] Speaker 05:
It was incomplete.

[00:18:52] Speaker 07:
Um, so you want to, you want to basically invoke Overton Park.

[00:18:56] Speaker 05:
Yes, Overton Park requires a full and complete administrative records.

[00:19:01] Speaker 07:
We did not excel off.

[00:19:02] Speaker 07:
Is that your first argument, your first preference here?

[00:19:06] Speaker 05:
No, our first, our preference is that this Court recognize that what was done in August of 2012 was directly contrary to the responsibilities of the agency acting at the direction of the Treasury, which was against the statute.

[00:19:24] Speaker 07:
I don't see how that's consistent with saying the record's inadequate.

[00:19:27] Speaker 05:
Well, we have learned enough to know that.

[00:19:29] Speaker 05:
But with the record, it was nonetheless inaccurate.

[00:19:31] Speaker 05:
We probably were learning more things.

[00:19:33] Speaker 07:
What's happened is that what we've learned is that there was another view somewhere out there.

[00:19:39] Speaker 05:
And the view, as the picture started to become rosier, and as the deferred tax assets became available to be released to change the financial condition, the Treasury Department said, instead of rehabilitating the companies, we will take all of their net worth in perpetuity and make it impossible for them to be rehabilitated.

[00:20:04] Speaker 07:
You would like, though, to depose ability, right?

[00:20:06] Speaker 07:
Pardon?

[00:20:07] Speaker 07:
You'd like to depose ability.

[00:20:09] Speaker 05:
Well, of course we would and we'd like the notes of meetings and you'd like to email.

[00:20:14] Speaker 05:
We would like the administrative record to be complete.

[00:20:16] Speaker 05:
But in addition to that, we believe that there is enough in this record to show that what the FHH FHFA did at that time was not justified for two of the reasons that they gave the downward spiral had stopped.

[00:20:33] Speaker 07:
Completing the record may reverse that inference that you just suggested.

[00:20:39] Speaker 05:
Well, I agree that at minimum we're entitled to a complete administrative record, not just somebody's summary of an administrative record.

[00:20:47] Speaker 05:
And that's Overton Park and other decisions of this court.

[00:20:51] Speaker 05:
But there is enough to know.

[00:20:52] Speaker 11:
The reason they didn't do the ordinary record here is they said that it's just APA review is injunctive and declaratory.

[00:21:00] Speaker 11:
And that's in the teeth of 4617F.

[00:21:03] Speaker 11:
We can't have that, so what's the point of bringing the record forward?

[00:21:06] Speaker 11:
I think that's their explanation.

[00:21:07] Speaker 05:
Well, that is what they're saying.

[00:21:09] Speaker 05:
But the County of Sonoma case specifically says that when the conservator acts beyond and contrary to its responsibilities as a conservator, then 4617 does not quickly review.

[00:21:22] Speaker 11:
And so what exactly is the test we're supposed to apply for acting beyond their authority as conservator?

[00:21:30] Speaker 11:
It can't be violated.

[00:21:33] Speaker 11:
the statute, the APA, or it would be a pointless provision.

[00:21:36] Speaker 05:
You have to show success to get an injunction.

[00:21:38] Speaker 05:
It would also be a provision that would eliminate any judicial review.

[00:21:41] Speaker 11:
So what is your definition?

[00:21:44] Speaker 05:
Our definition is when they're not acting as a conservator.

[00:21:47] Speaker 05:
If you're buying and selling assets, operating the business in a way designed to rehabilitate, then you're acting as a conservator.

[00:21:55] Speaker 11:
So what action did they do here that, let me give you a hypothetical.

[00:22:03] Speaker 11:
There had been no deferred tax asset issue.

[00:22:06] Speaker 11:
And so, as it turned out, Fannie Mae and Freddie Mac never made, at any time between 2008 and the present, or 2012 when the Third Amendment came in, and the president never made a profit.

[00:22:19] Speaker 11:
If they adopted the Third Amendment and there were no profits, so all they did was protect Fannie Mae and Freddie Mac from more and more debt, would that be consistent with being a conservator?

[00:22:31] Speaker 05:
No, it would not be consistent with being a conservator because it wasn't an act towards rehabilitating the entities.

[00:22:37] Speaker 11:
Stopping the hemorrhaging.

[00:22:38] Speaker 11:
If they were just going to keep losing, imagine they just keep losing money or if they get profits they're less than the 19 million they owe.

[00:22:45] Speaker 05:
They made it impossible, Your Honor, for these entities to operate.

[00:22:49] Speaker 05:
If you can imagine in the private sector taking a corporation or a bank

[00:22:53] Speaker 05:
for which you have responsibility to rehabilitate, to keep it sound and solvent, then issue a decree saying, I'm going to take all of your profits and give them to my uncle, or to give them to my friend.

[00:23:06] Speaker 05:
And so you can't operate in that normal way.

[00:23:09] Speaker 03:
We're going to- Yes, but we have a different statute here that lets- I'm sorry, I'm sorry.

[00:23:13] Speaker 03:
I was just gonna say Judge Malette is asking a hypothetical.

[00:23:17] Speaker 03:
Yes, I know.

[00:23:18] Speaker 03:
And the hypothetical is, let's assume that when Treasury gave up its right to dividends, the entities were not profitable.

[00:23:30] Speaker 03:
And so, in fact, they would have been getting nothing, because there were no net profits.

[00:23:38] Speaker 05:
They would still have had the right, Judge Brown, of providing that dividend in kind, which would have increased the liquidation preference, but would have preserved the capital of the entities.

[00:23:50] Speaker 03:
No, but we're assuming that they did the Third Amendment.

[00:23:54] Speaker 03:
It just wasn't successful.

[00:23:56] Speaker 03:
That is to say they gave up their right to the dividend and simply said, we're going to take whatever is generated as net profit to these entities.

[00:24:08] Speaker 03:
But nothing was generated.

[00:24:09] Speaker 03:
And the question is,

[00:24:11] Speaker 03:
In other words, does the argument that they were not acting as a proper conservator depend on the fact that they were, in fact, profitable?

[00:24:22] Speaker 05:
No, it doesn't.

[00:24:23] Speaker 05:
It depends upon whether the actions taken were calculated and had the purpose of keeping the institutions in a sound and solvent condition and were intended to rehabilitate the entities, what was intended, and the Treasury... Sorry, if they knew they were going to keep

[00:24:39] Speaker 11:
or they expected they were gonna keep either losing money or having profits that were gonna fall short of the dividends owed, if that was their understanding, how could it not be consistent with managing it or trying to get it into some sound and solvent situation to say, you don't have to pay the dividends, just give us what you can.

[00:25:01] Speaker 05:
Give us what you can.

[00:25:01] Speaker 05:
You can never get into a sound and solvent situation

[00:25:05] Speaker 05:
Every nickel of profit you make is given to someone else.

[00:25:09] Speaker 05:
You cannot possibly get... That's clearly true.

[00:25:14] Speaker 07:
I think that's clearly true.

[00:25:16] Speaker 07:
And the Treasury specifically said... But to avoid further spiraling down, right?

[00:25:20] Speaker 05:
Well, the record, I think, suggests that the downward spiral, the death spiral, whatever they'd call it, is not justified by the record.

[00:25:28] Speaker 05:
We haven't explored all of that.

[00:25:30] Speaker 05:
But basically, the Treasury said itself at the time of August of 2012, we're going to make sure that the taxpayers get everything and the stockholders get nothing.

[00:25:40] Speaker 05:
That was their intention.

[00:25:42] Speaker 05:
Their intention was to wind it down.

[00:25:44] Speaker 07:
In compensation for the risk we've taken.

[00:25:47] Speaker 05:
But that was not being acting as a conservatory.

[00:25:50] Speaker 05:
If they could have decided, if they had to move to a position of liquidating through a receivership, which is also permitted by these statutes, by this same statute that we're talking about, you could move to a receivership, which is essentially what they did.

[00:26:03] Speaker 05:
But they would then have to pay attention to the rights of stockholders and creditors.

[00:26:08] Speaker 07:
This press release you're talking about, that's from the Treasury, right?

[00:26:11] Speaker 07:
Yes.

[00:26:11] Speaker 07:
They're a creditor.

[00:26:13] Speaker 07:
What's the difference what the creditor says about what the Conservatives do?

[00:26:16] Speaker 05:
The Treasury is saying what it is doing as participating with the FHFA as implementing the net worth sweep.

[00:26:26] Speaker 07:
Did the Conservatives ever say this?

[00:26:28] Speaker 07:
Pardon me?

[00:26:28] Speaker 05:
It's other documents that the conservator is saying is the same thing and the treasury is saying we and the FHFA are done of doing these things.

[00:26:40] Speaker 07:
This is one government.

[00:26:43] Speaker 07:
The conservator is the FHFA.

[00:26:44] Speaker 07:
Does that make sense?

[00:26:46] Speaker 05:
And the conservator has done X, which is inconsistent with being of any reasonable interpretation of what the conservators do, and is doing it in con... Okay, but you attributed to both of them this...

[00:26:59] Speaker 05:
this is a motion to dismiss that Judge Lambert granted.

[00:27:06] Speaker 05:
The allegations of the complaint must be taken as true.

[00:27:10] Speaker 05:
We believe that to the extent that we have a record, it demonstrates that the FHFA and the Treasury Department were doing this together.

[00:27:19] Speaker 05:
They're saying it, that they're doing it together.

[00:27:22] Speaker 05:
Those allegations must be taken as true.

[00:27:25] Speaker 05:
The district court decided, with all due respect,

[00:27:28] Speaker 05:
that he decided various different things with respect to purpose and other evidentiary things that were not in the record, decided those in favor of the government, rendered his decision, and dismissed the complaint without providing an administrative record.

[00:27:45] Speaker 03:
I wanted to ask you about something that the district court does here, which is to say that these roles, conservator and receiver, are not hermetically sealed, and that they can sort of flow one into the other.

[00:28:01] Speaker 03:
Obviously, you don't agree with that.

[00:28:02] Speaker 03:
But my question is, what is it in the statute that you think precludes that kind of morphing from one to the other?

[00:28:13] Speaker 05:
Well, I think that you can

[00:28:15] Speaker 05:
become, you can decide that the role no longer is appropriate as a conservator and then you must be a receiver.

[00:28:23] Speaker 05:
But the receiver, if you're acting as a receiver, you can't just say we're doing it and then not respond to the responsibilities in the statute.

[00:28:31] Speaker 05:
The statute specifically says in Section J,

[00:28:35] Speaker 05:
all powers specifically granted to conservators or receivers respectively.

[00:28:42] Speaker 05:
The powers of a receiver are antithetical to the powers of a conservator.

[00:28:47] Speaker 05:
When you're acting as a receiver, you have a responsibility to stockholders, to predators, to behave in a certain way, to provide certain notices, to recognize certain obligations, and to deal with it in a certain way.

[00:29:00] Speaker 05:
You can change that.

[00:29:00] Speaker 11:
Well, when you say that, I guess I want to be precise.

[00:29:03] Speaker 11:
What exactly is it that your clients would get if a court were to declare the FHFA as having been a sub-rosa receiver since the Third Amendment?

[00:29:15] Speaker 11:
What would they get that they don't have?

[00:29:16] Speaker 05:
The network sweep is an invalid, arbitrary, capricious, and lawless administrative action under the EPA.

[00:29:23] Speaker 11:
Oh, is it lawless as a receiver?

[00:29:24] Speaker 11:
Would it be lawless if done as a receiver but not a conservator?

[00:29:27] Speaker 05:
They would have to, well, they would have to behave in a different way.

[00:29:30] Speaker 11:
No, no, that's what I'm asking you.

[00:29:31] Speaker 11:
I'm asking you, is the relief you want here an injunction undoing the Third Amendment and sending all these hundreds of billions of dollars back to Fannie Mae and Freddie Mac, or, I really want to finish this, or is it a declaration that as of the Third Amendment they were actually a receiver and you needed notice?

[00:29:49] Speaker 05:
No, that action, under those circumstances, when it was acting in its role as a conservator, was against the law.

[00:29:57] Speaker 11:
Was it against the law, or was it that they should have shifted to receive?

[00:30:03] Speaker 11:
They could have done it.

[00:30:04] Speaker 11:
Could they have done it as a receiver?

[00:30:05] Speaker 11:
If they said, we're taking this into receivership, here we go, and giving you your notice, could they have done it, or would have been unlawful as receivership?

[00:30:12] Speaker 05:
They would have had to go through certain steps.

[00:30:15] Speaker 05:
It would have articulated in the statute.

[00:30:17] Speaker 05:
They did not do that.

[00:30:19] Speaker 05:
what they have to do.

[00:30:20] Speaker 05:
You can't just say, okay, I wanted to do it under some other statute and so that's okay.

[00:30:26] Speaker 05:
Well, no, it's the same statute.

[00:30:27] Speaker 05:
Let's be clear about that.

[00:30:28] Speaker 11:
What I'm hypothesizing here is that the mistake is not, as you would say, doing this as a conservator because you can't do it.

[00:30:36] Speaker 11:
The mistake is they said we're doing it as receivership, but what they failed to do was the notice and statutory requirements.

[00:30:44] Speaker 11:
So is the remedy then that it's unlawful

[00:30:47] Speaker 11:
or for a receiver to do this as well, or is it just that there's some notice and procedural requirements that should have been undertaken?

[00:30:55] Speaker 05:
Not just notice and procedural requirements, recognition of the assets, recognition of the rights, recognition of property rights of creditors and stockholders and that sort of thing.

[00:31:04] Speaker 05:
So you can't just say, well, they could have done it as a receiver, but the network suite is not the act of a receiver.

[00:31:12] Speaker 05:
It might have been something because they wanted to wind down the

[00:31:15] Speaker 05:
the entities, that they could have transited into the other level of responsibility and complied with the law's requirements there.

[00:31:24] Speaker 05:
They did not do that.

[00:31:25] Speaker 11:
What we're seeking... What about creating a limited life entity?

[00:31:28] Speaker 11:
Well, that's a different type... No, but as we do as a receiver and you kind of keep...

[00:31:32] Speaker 11:
the company going for a couple years.

[00:31:34] Speaker 11:
And again, I know that doesn't fit the model of what happened here, but they surely would have before they had done that.

[00:31:39] Speaker 05:
It does not fit the model.

[00:31:41] Speaker 05:
It is not what those statutory provisions were intended to do when we addressed that in the reply brief.

[00:31:47] Speaker 11:
So just what is the remedy that you want here for this?

[00:31:50] Speaker 05:
The remedy is the remedy that the APA provides.

[00:31:53] Speaker 05:
The action of the network suite in August of 2012 was illegal, not justified by the statute, arbitrary, capricious, and inconsistent with what they were telling the world that they were actually doing.

[00:32:08] Speaker 05:
And therefore, it has to be set aside.

[00:32:11] Speaker 05:
Now, the details of that.

[00:32:12] Speaker 11:
No, not details.

[00:32:14] Speaker 11:
What happens if one sets aside the third amendment?

[00:32:17] Speaker 05:
What happens?

[00:32:18] Speaker 05:
The implementation of that decision is obviously something that the district court would have to work out.

[00:32:23] Speaker 05:
And that's why I said details.

[00:32:25] Speaker 05:
I mean, they're important details.

[00:32:26] Speaker 11:
Well, your clients must have something to read.

[00:32:27] Speaker 11:
They have to have a standing.

[00:32:28] Speaker 11:
So they must think there's some remedy they would get out of this.

[00:32:31] Speaker 05:
What's the remedy?

[00:32:32] Speaker 05:
The remedy is that once the network sweep is set aside, the financial circumstances of these people that invest

[00:32:38] Speaker 05:
in this company believing the statements that the government was giving them about, we won't liquidate.

[00:32:45] Speaker 05:
As a conservative, we don't intend to liquidate.

[00:32:48] Speaker 05:
Those representations that people in the marketplace relied upon, they're entitled to the fulfillment of those rights that they had at that time.

[00:32:58] Speaker 05:
When the government acted arbitrarily, illegally, beyond its powers, that has to be taken away, and we have to go back to that point.

[00:33:05] Speaker 05:
And to the extent that there are aspects of the implementation of that to be worked out, that's why we have district courts to do that sort of thing.

[00:33:14] Speaker 05:
But what this court's responsibility, I submit, is to recognize that what happened at that time in August of 2012 was beyond the power of the FHFA.

[00:33:25] Speaker 05:
under the statutes pursuant to which it was operating, it was supposed to be operating, and it said it was operating.

[00:33:32] Speaker 05:
It was illegal, it was unlawful.

[00:33:33] Speaker 11:
And what you say makes it illegal, just I want to be crystal clear, what they violated, you say, is the requirement that they

[00:33:40] Speaker 11:
manage it and progress it toward a sound and solvent condition.

[00:33:46] Speaker 05:
And preserve and conserve the assets and rehabilitate the entity.

[00:33:51] Speaker 05:
This is not something I'm making up.

[00:33:53] Speaker 11:
It's in the statute.

[00:33:55] Speaker 11:
Where's rehabilitate?

[00:33:56] Speaker 05:
Rehabilitate the agency to a sound and solvent condition.

[00:33:59] Speaker 05:
This is not something that I've come up with.

[00:34:02] Speaker 05:
This is in the statutes.

[00:34:04] Speaker 05:
It's in the regulations that the agency itself has put out.

[00:34:09] Speaker 05:
It's in the statement of what the agency said it was going to do when it took this step back in 2008 and did everything directly.

[00:34:20] Speaker 10:
Sorry, I just want to make sure, because I do want to make sure I've got it right.

[00:34:26] Speaker 11:
where it says that they have a, I take it you mean by rehabilitate is to make it profitable again for private investors?

[00:34:32] Speaker 05:
For A to B.

[00:34:35] Speaker 05:
AB2 rather, D, powers of conservator, the agency shall take such actions that may be necessary to put the regulated entity in a sound and solvent condition, that's I, and then small i2, appropriate to carry out the business of the regulated entity and preserve and conserve the assets and the property of the regulated entity.

[00:34:59] Speaker 11:
And if they thought, if they thought, again this is hypothetical, I'm not fighting with your record materials, if they thought

[00:35:05] Speaker 11:
that there were not going to be any profits.

[00:35:08] Speaker 11:
We have to stop the hemorrhaging.

[00:35:10] Speaker 11:
We have to stop the hemorrhaging.

[00:35:12] Speaker 11:
There's never going to be enough profits, we think, in the foreseeable future to pay the dividends.

[00:35:18] Speaker 11:
And so they do the Third Amendment on that basis.

[00:35:20] Speaker 11:
Would that not count?

[00:35:21] Speaker 05:
The Third Amendment was a stock.

[00:35:23] Speaker 05:
This is another part of the record and the brief and the arguments.

[00:35:27] Speaker 05:
There was essentially a stock purchase.

[00:35:29] Speaker 05:
They went from being a creditor to a holder of all of the common stock by having the ability to take all of the assets.

[00:35:37] Speaker 05:
That ability to do that was restricted under HERA, H-E-R-A, the statute to end at the end of 2009.

[00:35:44] Speaker 05:
What they did in 2012 was inconsistent

[00:35:47] Speaker 05:
with that limitation on their authority.

[00:35:50] Speaker 11:
But to answer your... That's your argument about the sunset provision, right?

[00:35:54] Speaker 11:
That's what you're talking about is your argument about Treasury violating the sunset provision.

[00:35:57] Speaker 11:
Yes.

[00:35:58] Speaker 11:
I still want to get back on 2D here, A2D, and that is if they thought that there weren't gonna be any profits, or maybe there'd be a blip for one year for tax credits, but that going forward it was gonna be hemorrhaging, could you take these measures

[00:36:17] Speaker 11:
Would that constitute as sound insolvent as this thing can be by stopping the hemorrhaging and carrying on the business and conserving the assets by stopping the hemorrhaging?

[00:36:27] Speaker 05:
No, they weren't stopping the hemorrhaging.

[00:36:30] Speaker 11:
If they were, my hypothetical.

[00:36:32] Speaker 05:
But your hypothetical makes up facts that are directly contrary to the record.

[00:36:37] Speaker 05:
That's what hypotheticals do.

[00:36:40] Speaker 11:
I want to know when you talk about what it means to keep something in a sound and solvent condition and conserving the assets, if they don't think there's going to be a pattern of profits and there's going to be more hemorrhaging than profits, could they take a step like this?

[00:36:56] Speaker 11:
I know you say that isn't this case and that's the problem here and you have your record arguments about that.

[00:37:02] Speaker 11:
But could it ever be consistent with the conservative's duties under the statute to stop the hemorrhaging by saying, just give us whatever you can pay each year.

[00:37:13] Speaker 11:
We won't demand more than whatever you can pay.

[00:37:16] Speaker 05:
No.

[00:37:16] Speaker 05:
My answer to that is that they would have at that point decided to wind down the entity.

[00:37:22] Speaker 05:
which is what they said they did in August of 2012.

[00:37:25] Speaker 05:
They've made the step to wind down the entity.

[00:37:30] Speaker 05:
At that point, they should have said, we were wrong.

[00:37:33] Speaker 05:
Acting as a conservator, which, by the way, the facts suggest that was working,

[00:37:38] Speaker 05:
Under your hypothetical, they could say, we were wrong.

[00:37:42] Speaker 05:
We now want to wind down the entity, which is what they said they were doing with the net worth sweep, and we are going to have to move to the provisions in the same statute that provide for a receivership and liquidation of the company.

[00:37:55] Speaker 05:
That's what they said in 2008 they weren't going to do as a conservator.

[00:38:00] Speaker 11:
just make sure I understand this, your position is if they've made this determination that we can't, they're just never gonna get to a point of consistent profits, then they can't conserve it anymore.

[00:38:12] Speaker 11:
Once they've made that judgment, they have to go to receivership.

[00:38:15] Speaker 05:
Is that what I'm saying?

[00:38:16] Speaker 05:
Yes, that's the other authority that the FH

[00:38:18] Speaker 05:
FAA has under this provision of the laws of the United States.

[00:38:22] Speaker 05:
They can act as a conservator, or they can act as a receiver.

[00:38:25] Speaker 05:
Being a receiver is not a conservator.

[00:38:28] Speaker 05:
Being a conservator is not a receiver.

[00:38:30] Speaker 05:
If they had decided under that hypothetical that that was something that needed to be done, they had to move into another pattern, operate under the procedures of the statute, and give them powers of a receiver, and give rights to other people that are affected by that decision.

[00:38:45] Speaker 05:
They didn't do that.

[00:38:47] Speaker 07:
They didn't do that.

[00:38:50] Speaker 07:
So throughout this period, and when the Third Amendment was entered into, as I recall, the combined portfolios of the two GSEs was roughly $5 trillion.

[00:39:02] Speaker 07:
All right?

[00:39:03] Speaker 07:
Yeah.

[00:39:05] Speaker 07:
So suppose that the supplemented record would reveal that the Treasury and the FA were of the view

[00:39:15] Speaker 07:
that there's no way to liquidate a $5 trillion portfolio.

[00:39:20] Speaker 07:
All of the possible purchasers of pieces of this portfolio could not muster $5 trillion.

[00:39:25] Speaker 07:
So we're going to have to wind it down until we get to a stage where it's practical to liquidate it.

[00:39:32] Speaker 07:
And that will happen, assuming they don't make profits that no one expects them to make.

[00:39:38] Speaker 07:
That will happen with this sweep, at least that way.

[00:39:42] Speaker 07:
It will happen within a few years, and then we'll be able to liquidate.

[00:39:48] Speaker 05:
I think you're asking me then what should they have done under our theory?

[00:39:52] Speaker 07:
And indeed, what they did do wouldn't have a benign explanation.

[00:39:58] Speaker 05:
Well, I submit that the record supports the proposition, the record that we have so far, supports the proposition that they saw the pot at the end of the pot of gold at the end of the rainbow.

[00:40:12] Speaker 05:
They decided we're going to take that away from the stockholders and we're going to give it to the Treasury Department because we have a budget deficit and this is going to be a big help.

[00:40:21] Speaker 07:
The only person who saw a pot of gold at the end of the rainbow was possibly Mr. McFarland.

[00:40:27] Speaker 05:
Well, it wasn't just a mis- And it is supported by what happened subsequently to that.

[00:40:33] Speaker 07:
That can't reflect that, Mother.

[00:40:35] Speaker 05:
Well, if we're speculating about the future, and the record does support that, and the $58 billion that I mentioned is subsequent to that, but part of the record does support that there was a point at which the amount coming into the Treasury exceeded the amount that

[00:40:54] Speaker 05:
Treasury had put into the GSEs.

[00:40:58] Speaker 07:
Sometimes after the third minute.

[00:41:00] Speaker 05:
Yes, but based upon what you could see, based upon the 10Ks that were at the end of the year and so forth, the information was available.

[00:41:09] Speaker 05:
People saw that the housing market had turned around by then, by 2012.

[00:41:13] Speaker 05:
Things had changed enormously.

[00:41:16] Speaker 07:
And we believe... Well, not so much that there was unanimity.

[00:41:19] Speaker 07:
We still had the

[00:41:22] Speaker 07:
The ten queues, we had the Grant Thornton report, all of that, which was September of 2011.

[00:41:26] Speaker 07:
At least the data were.

[00:41:28] Speaker 07:
The report was done in March or June.

[00:41:31] Speaker 05:
Well, would you?

[00:41:34] Speaker 07:
Before the district court, when you were seeking to supplement the administrative record,

[00:41:38] Speaker 07:
As I recall, one of your arguments was, or maybe your principal argument was, we need to know what their explanation is for why they did this.

[00:41:46] Speaker 07:
And the district judge said their motivation is not relevant to the question of whether they conformed to the law.

[00:41:51] Speaker 07:
Yes.

[00:41:52] Speaker 07:
You said it is relevant.

[00:41:53] Speaker 07:
Yes.

[00:41:54] Speaker 07:
And so if we fully explore that, if you get an opportunity fully to explore that, I'm saying isn't it possible that one of the things one could turn up is an entirely lawful explanation.

[00:42:07] Speaker 07:
I don't believe it's going to happen.

[00:42:10] Speaker 07:
Because liquidation at that scale was not practical.

[00:42:14] Speaker 07:
And only by winding it down to a practical scale could they ever... I don't believe that that's what we'll find out, Your Honor.

[00:42:21] Speaker 05:
But you said, is it possible?

[00:42:23] Speaker 05:
I suppose it's possible.

[00:42:24] Speaker 05:
But that's what happens when we're both speculating about what's in a record that have been denied to us.

[00:42:29] Speaker 07:
Exactly right.

[00:42:29] Speaker 07:
Exactly right.

[00:42:31] Speaker 07:
So the question of motivation could cut either way here.

[00:42:37] Speaker 07:
It might not be irrelevant.

[00:42:39] Speaker 05:
It certainly is relevant with respect to whether an entity is operating in a fiduciary capacity as a conservator.

[00:42:48] Speaker 05:
Because a conservator has, and the agency... Motivation is relevant to that, you're saying?

[00:42:55] Speaker 05:
Yes, yes.

[00:42:55] Speaker 07:
District Judge disagreed with that.

[00:42:57] Speaker 05:
Yes.

[00:42:57] Speaker 07:
You have constructed one and I've constructed another scenario in which it is relevant.

[00:43:02] Speaker 05:
Yes.

[00:43:02] Speaker 05:
Okay.

[00:43:03] Speaker 05:
Yes, I agree with that.

[00:43:04] Speaker 07:
I don't know why we should go any further than that.

[00:43:06] Speaker 05:
Well, perhaps.

[00:43:07] Speaker 05:
I think that you have enough, and I think I've taxed your patience, Judge Brown, so I was set down.

[00:43:15] Speaker 05:
I think you have enough to decide that the network sweep was not what it was said to be, and it was not consistent with acting as a conservatory.

[00:43:22] Speaker 05:
I think you have enough.

[00:43:23] Speaker 05:
But at minimum, we're entitled to have a record that we can try this, and we're entitled to have a district court decision that accepts as true the allegations of the complaints so that we can go forward.

[00:43:44] Speaker 04:
Good morning, Your Honors, and may it please the Court.

[00:43:45] Speaker 04:
This is Hamish Hume from Boiesville and Flexner, representing the class of private, preferred, and common shareholders of Fannie and Freddie.

[00:43:53] Speaker 04:
Your Honors, the class advances claims of breach of contract, breach of fiduciary duty, common law claims.

[00:44:01] Speaker 04:
We've just heard a lot about a very important APA claim, but our claims are not APA claims.

[00:44:07] Speaker 04:
I would urge the Court to free itself from the confines of the APA in considering our common law claims, because we are not limited to the concept of an administrative record or the concept of whether the agency acted reasonably within the confines of the statute.

[00:44:25] Speaker 11:
How can fiduciary duty claims, common law fiduciary duty claims survive a statute that first assigns all titles, powers, and privileges and rights of stockholders to FHFA and provides that any actions authored, the agency deterrent can be taken by the agency if they determine to be in the best interest of the regulated entity or the agency.

[00:44:48] Speaker 11:
How can a common law fiduciary claim survive that?

[00:44:52] Speaker 04:
Let me answer that first with a derivative claim and then the direct claim, if I might.

[00:44:56] Speaker 04:
With respect to a derivative fiduciary duty claim, there are two courts of appeal, the Federal Circuit and the Ninth Circuit, that both held that the identical statute in Firea allowed a derivative claim because of the manifest conflict of interest, when there's a manifest conflict of interest, between the conservator and whoever it's being asked to sue.

[00:45:22] Speaker 04:
That was well established from 1999 onwards.

[00:45:26] Speaker 04:
And it was no small decision.

[00:45:29] Speaker 04:
It led to a whole slew of cases in the Winstar litigation worth billions of dollars in which private shareholders were permitted to pursue both derivative and direct claims.

[00:45:41] Speaker 04:
Because the first Hartford decision didn't just allow the derivative claim when there was a manifest conflict, but also allowed shareholders to pursue a direct claim.

[00:45:49] Speaker 04:
at pages 1288 to 1289 of that Federal Circuit decision.

[00:45:54] Speaker 04:
And it was a huge deal.

[00:45:56] Speaker 04:
It led to these win-star cases that went on and on and on, seeking billions of dollars and collecting billions of dollars from the government.

[00:46:04] Speaker 04:
Congress knew that.

[00:46:06] Speaker 04:
when it enacted HERA.

[00:46:07] Speaker 04:
And it enacted the identical statute in HERA, knowing that.

[00:46:11] Speaker 04:
And on page 27 of our opening brief, we cite two decisions of this court, City of Donahue v. FAA and Gordon v. Capitol Police, both of which say unequivocally that when Congress adopts a statute that's identical in wording to a prior statute, and that's been interpreted by the courts, that generally indicates that Congress adopted the judicial interpretation.

[00:46:33] Speaker 04:
Our friends, the defendants, the employees never respond to those cases.

[00:46:37] Speaker 04:
They say nothing about them.

[00:46:38] Speaker 04:
In fact, the FHFA embraces that concept in its brief and says, in trying to argue with the APA case, says that Congress has blessed the Third Amendment because it enacted the Consolidated Appropriations Act of 2016, which sort of talked about the Third Amendment, talked about where the money would be spent, and didn't say anything bad about the Third Amendment.

[00:47:00] Speaker 04:
So they embrace the proposition that Congress knows what's going on, and when Congress adopts an identical statute, it embraces what the courts have said about it.

[00:47:08] Speaker 04:
And the courts have said when there's a manifest conflict of interest, then... Two courts have said.

[00:47:14] Speaker 11:
Two courts have said.

[00:47:16] Speaker 04:
Two courts have said that, and no court has rejected it, other than Judge Lamberth below.

[00:47:20] Speaker 11:
I'm just trying to figure out what the conflict of interest is when they're entitled to act in the agency's best interests, as much as the entities.

[00:47:28] Speaker 11:
And the whole point of shareholder derivative sense is that there's deemed to be a conflict of interest.

[00:47:33] Speaker 11:
I just don't understand how it works.

[00:47:35] Speaker 04:
Judge Miller, I'm glad you asked that question because one error in Judge Lambert's reasoning that I don't think we clearly identified in our briefs, it is absolutely not correct to say that the exception swallows the rule here.

[00:47:48] Speaker 04:
It is absolutely not correct to say that derivative suits only exist when there's a conflict of interest.

[00:47:54] Speaker 04:
This court's decision in Kelmer is a perfect illustration.

[00:47:58] Speaker 04:
It was a derivative case.

[00:48:00] Speaker 04:
in which there was no conflict of interest.

[00:48:02] Speaker 04:
It's just that the company chose, in its decision, in its business judgment, that it wasn't worth suing Franklin Reigns and the other officers.

[00:48:11] Speaker 04:
The shareholders disagreed.

[00:48:12] Speaker 04:
It wasn't a conflict of interest, let alone a manifest, inescapable conflict of interest, just a difference of judgment.

[00:48:18] Speaker 04:
That's why the derivative claim generally exists.

[00:48:21] Speaker 04:
So there are lots of instances in which derivative claims couldn't be brought by shareholders and would be the decision of the conservator.

[00:48:27] Speaker 04:
But when you're asking the conservator to sue itself, you have gone through the looking glass into a world of absurdity if you say that shareholders cannot bring that claim, and that's what the first heart for you.

[00:48:40] Speaker 11:
But it's okay to make a decision in the interest of itself.

[00:48:44] Speaker 11:
When the agency is a conservator and the agency can make a decision in the interests of the agency, then it's okay.

[00:48:50] Speaker 11:
It seems to me the statute is saying that's not a conflict of interest.

[00:48:54] Speaker 11:
They take actions as long as they're in the best interest of the entity or the agency.

[00:48:58] Speaker 11:
And so then to sue on the grounds that, well, they won't sue because they made the decision in the best interest of themselves, the agency doesn't seem to grapple with how these two sections intersect.

[00:49:10] Speaker 04:
I don't think it's possible to read the statute as conferring on the FHFA the authority to decide whether or not to sue itself

[00:49:21] Speaker 04:
for violating fiduciary duties.

[00:49:23] Speaker 04:
It says, the succession provision says that the FHFA as conservator succeeds to the rights, powers, and privileges of the company with respect to the regulated entity and its assets.

[00:49:39] Speaker 04:
I would submit that the textual, I think Judge Millett

[00:49:43] Speaker 04:
Maybe what you're asking is, where in the statute can I attach this notion of a manifest conflict of interest exception?

[00:49:51] Speaker 04:
And I would suggest the word conservator may be the place to put it, because if they're not acting as a – if the question is whether they violated their fiduciary duties,

[00:50:01] Speaker 04:
then the real question is whether they can sit as judge and jury over that claim.

[00:50:06] Speaker 04:
I would concede that the statute doesn't talk about an exception, and the courts have read it in.

[00:50:13] Speaker 04:
In fact, First Hartford doesn't really even talk about it as an exception.

[00:50:15] Speaker 04:
It simply says there's no way Congress could have intended that.

[00:50:19] Speaker 04:
If there's a manifest conflict of interest, then the derivative claim is possible.

[00:50:23] Speaker 04:
And I think that the backdrop to that is a constitutional avoidance doctrine, because you can't read the statute to do something that would be an obvious due process violation.

[00:50:34] Speaker 04:
There's a whole string of Supreme Court cases going back to the 1920s.

[00:50:37] Speaker 11:
Due process isn't taking of property?

[00:50:39] Speaker 04:
Yes, but also the inability to advance your own claim.

[00:50:45] Speaker 04:
And I think if I would refer the court to the plaintiff's...

[00:50:49] Speaker 11:
I don't see the inability to advance your own claim if it's not your own claim.

[00:50:54] Speaker 11:
It's not a due process problem unless the argument is that they took your claim, which is back to taking a property, right?

[00:51:01] Speaker 11:
So that's the only constitutional.

[00:51:02] Speaker 04:
I think for the derivative claim, the constitutional avoidance issue may depend in part on whether there's also a direct claim that could be brought.

[00:51:12] Speaker 04:
All I'm saying is I think the courts have suggested there may be a due process issue as well in the first Hartford case.

[00:51:19] Speaker 07:
You're a part of the Takings case in the claims court.

[00:51:22] Speaker 04:
Yes, I am.

[00:51:24] Speaker 11:
your direct claim.

[00:51:25] Speaker 11:
I just didn't see you raising that blow in the district court.

[00:51:28] Speaker 04:
Yes, I understand.

[00:51:29] Speaker 04:
I think all I would say is this judge Miller in count seven of our complaint, we did refer to a fiduciary duty to shareholders four different times.

[00:51:39] Speaker 04:
I would concede that the clarity with which we pled a direct claim and the clarity with which we briefed it left something to be desired.

[00:51:53] Speaker 11:
You can tell me where you raised it not so clearly.

[00:51:59] Speaker 04:
Your Honor, I think it's Paragraph 377.

[00:52:02] Speaker 04:
It's in, if you look at Count 7 of our complaint, you will see a reference four different times.

[00:52:10] Speaker 04:
I can give you the exact sites if you'd like.

[00:52:14] Speaker 07:
Four references to what?

[00:52:16] Speaker 04:
To, in Paragraph 176, 177 and 180.

[00:52:20] Speaker 04:
Twice in 176.

[00:52:21] Speaker 11:
Sorry, which page, JA are you on?

[00:52:23] Speaker 11:
I'm sorry.

[00:52:23] Speaker 04:
This is, I don't have the JA site, but it's in our third amended complaint.

[00:52:28] Speaker 04:
But before I delay you too long with it, I'm simply saying that we say fiduciary owed to the shareholders four different times in those three paragraphs.

[00:52:41] Speaker 04:
We briefed a derivative claim.

[00:52:43] Speaker 04:
We would submit two things, Your Honors, on our direct fiduciary breach claim.

[00:52:46] Speaker 04:
First, under the lenient notice pleading, maybe three things.

[00:52:50] Speaker 04:
First, under notice pleading, I think we said enough.

[00:52:53] Speaker 04:
Second, that's especially true in light of the fact that the Delaware courts, in the Gatz case and the Gentile case, which are both cited repeatedly in our briefs and other briefs,

[00:53:03] Speaker 04:
have recognized that in some situations, a fiduciary breach claim can be both direct and derivative, modifying to some degree the Tooley decision.

[00:53:15] Speaker 11:
And that's exactly- Did you brief this to the district court?

[00:53:18] Speaker 11:
So it's not in your complaint.

[00:53:19] Speaker 11:
Did you brief it to the district court?

[00:53:21] Speaker 11:
We did not.

[00:53:23] Speaker 07:
Did you brief, as a separate matter, as you have here, the claim that the Networth Street violates – pardon me – that there was a breach of the implied covenant of good faith?

[00:53:38] Speaker 04:
Yes.

[00:53:39] Speaker 07:
You did breach that.

[00:53:40] Speaker 07:
Yes, and I'd like to turn to the – If successful, that would be –

[00:53:45] Speaker 07:
fully adequate for the relief that you would claim as a fiduciary.

[00:53:49] Speaker 04:
I think that's probably correct, Judge Ginsburg, there.

[00:53:52] Speaker 07:
So the argument would be, okay, they have dual loyalties here, unlike an ordinary fiduciary, unlike a Delaware fiduciary, but like the FDIC.

[00:54:03] Speaker 07:
And they have to administer that inherent conflict in good faith.

[00:54:07] Speaker 04:
Absolutely.

[00:54:08] Speaker 04:
And in fact, if I could, if I may just finish the questions on the direct claim, Judge Millett.

[00:54:14] Speaker 04:
This court does have the authority, its discretion rarely exercised to allow us to amend, to add a direct claim.

[00:54:20] Speaker 04:
And the citation for that is DKT Memorial Fund, the Agency for International Development, 810F, 2nd, 1236 at 1239.

[00:54:30] Speaker 04:
If the court thinks it's necessary after full consideration that we amend, we ask to amend.

[00:54:34] Speaker 04:
But it may not be because I think our breach of contract claim, our breach of implied covenant claim, clearly must survive and the decision will be reversed.

[00:54:44] Speaker 04:
In considering our contract claims, Your Honors, we would urge the Court to look at the substance, the basic economic substance of what happened and not accept the highly formalistic

[00:54:58] Speaker 04:
arguments of the defendant at the lease and, respectfully, of the district court below.

[00:55:04] Speaker 04:
Here's the basic economic substance of what happened.

[00:55:07] Speaker 04:
Under the original PSPA, the Treasury Department had senior preferred stock, entitling it to get a coupon of 10 percent every year on the full amount of its investment plus an extra $2 billion.

[00:55:22] Speaker 04:
It also had a right to buy 80% of the common stock of these two companies for a nominal price.

[00:55:29] Speaker 04:
And everyone keeps saying a nominal price.

[00:55:31] Speaker 04:
I looked it up, and if my math is correct, the nominal price is about $10,000 to $15,000 for 80% of Fannie and Freddie.

[00:55:41] Speaker 04:
That stock's worth it.

[00:55:42] Speaker 04:
Do you know what the market value was at the time?

[00:55:44] Speaker 04:
I know that the preferred stock, the junior preferred stock,

[00:55:53] Speaker 04:
I know that the first stock before the Third Amendment was trading at about just over $2 billion, between $2 and $3 billion market cap.

[00:55:59] Speaker 04:
I don't know it.

[00:56:00] Speaker 07:
About $0.15 a share.

[00:56:02] Speaker 04:
I don't know that per share price, and I don't know it from September of 2008.

[00:56:06] Speaker 04:
But I'm confident it was more than $15,000.

[00:56:09] Speaker 04:
And I'm very confident that in a liquidation, it would have been worth more than that.

[00:56:14] Speaker 04:
But in any event,

[00:56:16] Speaker 04:
The original structure was that, which is revealing, first of all, and showing the Treasury was a stockholder.

[00:56:21] Speaker 04:
All the stuff you're hearing about, there are no stockholders.

[00:56:23] Speaker 04:
Stockholders have nothing.

[00:56:24] Speaker 04:
Stockholders are gone.

[00:56:26] Speaker 04:
They're wiped off the face of the planet.

[00:56:27] Speaker 04:
It's not true at all.

[00:56:28] Speaker 04:
The Treasury is a stockholder.

[00:56:29] Speaker 04:
They put in their agreement a choice of law clause, a venue clause, where they're going to litigate.

[00:56:34] Speaker 04:
They're a stockholder.

[00:56:34] Speaker 04:
They have rights as a stockholder.

[00:56:36] Speaker 04:
They can litigate as a stockholder.

[00:56:37] Speaker 04:
They're entitled to dividends as a stockholder.

[00:56:40] Speaker 04:
First, preferred senior, 10%.

[00:56:43] Speaker 04:
Then, 80% of the common.

[00:56:45] Speaker 04:
That is clearly saying that if the companies make enough money to pay dividends in excess of 10%, and if they decide to do so, they first have to pay the junior preferreds

[00:57:00] Speaker 04:
whose total cumulative dividend, if paid, that there are different coupon rates, but it's a total face amount of $35 billion, their coupon would maybe be somewhere at 5%, somewhere at 8%, at 7%, it would maybe be $2.7 billion.

[00:57:15] Speaker 04:
Then, if Treasury wanted more, it can take the $10,000 or $15,000 by 80% of the common and get 80% of the rest of the dividends.

[00:57:24] Speaker 04:
So here's what happened.

[00:57:26] Speaker 04:
The companies did become profitable.

[00:57:29] Speaker 04:
Susan McFarland did think that the $50 billion tax would be reversed.

[00:57:34] Speaker 04:
And I'm sorry, but I read the August 9, 2012 projections differently than the court.

[00:57:40] Speaker 04:
I urged the court to look at them.

[00:57:42] Speaker 04:
They were conservative compared to what happened, but they were still optimistic.

[00:57:46] Speaker 04:
August, those two documents submitted with the 7.

[00:57:50] Speaker 04:
There's an August 9, 2012 projection and an August 11, 2012 projection.

[00:57:55] Speaker 07:
Are these the 10 Qs or are these something different?

[00:57:57] Speaker 04:
No, they're internal Fannie projections and they show a projection of when the dividends will exceed the draws in 2019 for one enterprise and 2020 for the other.

[00:58:08] Speaker 04:
Now it turned out.

[00:58:09] Speaker 04:
Namely when?

[00:58:11] Speaker 07:
I'm sorry?

[00:58:11] Speaker 07:
They said, they showed when they would exceed, when was that?

[00:58:16] Speaker 04:
The projection was made right before the Third Amendment, projected that they're going to have gotten more money back than they put in in dividends alone by 2019 or 2020.

[00:58:31] Speaker 04:
So if they're not projecting a death spiral, they're projecting a recovering, fading, and fading.

[00:58:36] Speaker 04:
They're going to be hugely profitable.

[00:58:38] Speaker 04:
Now, they underestimated how profitable, but they knew they were going to be profitable.

[00:58:43] Speaker 07:
Just to one point, these documents are recently unsealed documents?

[00:58:47] Speaker 04:
That's correct.

[00:58:48] Speaker 04:
And I have them, unfortunately, by the exhibit numbers.

[00:58:51] Speaker 04:
They were given in the court of federal claims where they were exhibits G and H. But basically, that means they were the fifth and sixth of the seven documents

[00:59:01] Speaker 04:
in order.

[00:59:01] Speaker 04:
They had different exhibit numbers.

[00:59:03] Speaker 07:
Do you have the dates on them?

[00:59:04] Speaker 07:
What's that?

[00:59:05] Speaker 07:
Do you have the dates on them?

[00:59:06] Speaker 04:
Yes.

[00:59:07] Speaker 04:
The first one is August 9, 2012, and the second is August 11, 2012.

[00:59:13] Speaker 07:
So the August 9, 2012 document is Fannie Mae's projection, right?

[00:59:19] Speaker 04:
That's right.

[00:59:21] Speaker 07:
And the 11th is what?

[00:59:24] Speaker 04:
It's an email from David Benson of Fannie to somebody at Treasury really sending the same projections.

[00:59:30] Speaker 07:
Okay, so there's a section.

[00:59:34] Speaker 04:
Freddie's not in this picture.

[00:59:34] Speaker 04:
Freddie is in it.

[00:59:36] Speaker 04:
I don't know why it's coming from Fannie only, but projections are for Freddie as well.

[00:59:41] Speaker 04:
They're just a page with both projections.

[00:59:43] Speaker 04:
In fact, Freddie has better projections.

[00:59:45] Speaker 04:
They're destined to have returned more money than any money drawn down by 2019.

[00:59:50] Speaker 04:
Now, here's what actually happened.

[00:59:53] Speaker 11:
Virginia law for Freddie Mac, that was different than Delaware law, right?

[00:59:57] Speaker 04:
I'm sorry, Judge.

[00:59:58] Speaker 11:
Is Virginia law different than Delaware law for Freddie Mac?

[01:00:01] Speaker 04:
I don't think it's different in any material respect here, and I haven't heard the defendants argue that it is.

[01:00:06] Speaker 11:
I thought that's why this was coming at us from Fannie Mae, because that's where you had precedent.

[01:00:11] Speaker 11:
You didn't have it for Freddie Mac in Virginia.

[01:00:15] Speaker 11:
Am I wrong?

[01:00:16] Speaker 04:
I'm sorry, I don't understand the question.

[01:00:18] Speaker 04:
The projections were coming from Fannie.

[01:00:23] Speaker 04:
It's true that Freddie is subject to Virginia law and Fannie is subject to Delaware law.

[01:00:29] Speaker 11:
And are they the same for purposes of contract claims, implied covenant claims, and fiduciary duty claims?

[01:00:37] Speaker 04:
Directly or directly?

[01:00:39] Speaker 04:
Yes, I think they are the same for contract and implied covenant.

[01:00:43] Speaker 04:
I am not aware of a difference with those respects.

[01:00:46] Speaker 04:
On fiduciary duty, Virginia may be a little tougher on the direct fiduciary duty claim than Delaware.

[01:00:59] Speaker 11:
I'm sorry, were you done answering that?

[01:01:01] Speaker 11:
I want to let you finish answering that question.

[01:01:03] Speaker 04:
If I might, I would like to just finish sort of the presentation of the core substance of what happened, because I've explained the original structure.

[01:01:08] Speaker 11:
And I want to get back if that's what you're doing on the contract.

[01:01:11] Speaker 11:
You don't challenge the PSPAs.

[01:01:13] Speaker 04:
That's correct.

[01:01:14] Speaker 11:
And did the PSPAs provide that the entities could not make any distributions of capital otherwise until treasury stock was paid off?

[01:01:26] Speaker 04:
I don't think they say that you can't make any distribution until the stock is paid off.

[01:01:32] Speaker 04:
It says it can't make a redemption of the treasury stock until the stock is paid off.

[01:01:39] Speaker 11:
Tell me if I'm wrong, from J.A.

[01:01:41] Speaker 11:
2451, they may not declare or pay any dividend, preferred or otherwise, or make any other distribution by reduction of capital or otherwise, whether in cash, property, securities, or a combination thereof,

[01:01:52] Speaker 11:
other than to Treasury, until Treasury's paid off.

[01:01:55] Speaker 11:
Am I misunderstanding that?

[01:01:55] Speaker 04:
I think Treasury has the right to consent to it.

[01:01:58] Speaker 04:
I think that's, Treasury has the right, has to consent to any dividend that is paid.

[01:02:03] Speaker 11:
And they haven't done that.

[01:02:04] Speaker 04:
They haven't done that.

[01:02:05] Speaker 11:
So how does this affect your contract claim?

[01:02:08] Speaker 04:
It makes it contingent.

[01:02:10] Speaker 04:
It simply makes it contingent because, listen, here's one.

[01:02:14] Speaker 04:
All dividend rights are contingent.

[01:02:16] Speaker 04:
In fact, even if you read the senior preferred stock agreement, the treasury's dividend rights were contingent on the board declaring them.

[01:02:23] Speaker 04:
All dividends in the private stock market.

[01:02:25] Speaker 11:
And Congress has now declared, passed a law, that they can't pay these dividends either, correct?

[01:02:31] Speaker 04:
No, I'm not.

[01:02:32] Speaker 11:
The 2016 act prevents them from paying back.

[01:02:35] Speaker 11:
Treasury can't even sell its stock or have it.

[01:02:38] Speaker 04:
No, the 2016 statute does not say that they cannot pay dividends to private shareholders.

[01:02:43] Speaker 11:
No, so you have this provision that says you gotta pay treasury, you gotta buy treasury off first.

[01:02:50] Speaker 11:
And then the 2016 act says treasury, you can't sell anything.

[01:02:53] Speaker 11:
And so I'm trying to figure out how those together leave you with much of any contract claim.

[01:02:58] Speaker 11:
It seems it's less than contingent at this point.

[01:03:01] Speaker 11:
But if I'm misunderstanding, please tell me.

[01:03:03] Speaker 04:
Well, I'm not sure I'm understanding the relevance of the Appropriations Act.

[01:03:07] Speaker 04:
What we're saying is that the basic substance of what happened here is that in the three years after the Third Amendment, dividends were paid from the enterprises to Treasury of $130 billion.

[01:03:23] Speaker 04:
If dividends had been paid pursuant to the original agreement,

[01:03:28] Speaker 04:
10% would have gone as senior preferred stock to the Treasury.

[01:03:33] Speaker 04:
And the 130 is in excess of the 10%.

[01:03:38] Speaker 04:
So the 130 dividends that would have been paid, at most, again, we don't know the exact amount of the preferred dividend, but it would have been somewhere between six and nine.

[01:03:47] Speaker 04:
Let's call it seven and a half.

[01:03:49] Speaker 04:
the remainder, 122 or so, would have been divided 80-20 between the comma.

[01:03:55] Speaker 04:
So Treasury still would have gotten $100 billion of the 130.

[01:03:58] Speaker 04:
They just didn't want to give the private shareholders anything.

[01:04:03] Speaker 04:
So they leapfrog.

[01:04:04] Speaker 04:
There are mandatory dividend rights in the contracts.

[01:04:08] Speaker 04:
And by the way, Judge Miller, if there's something in that appropriations act that's inconsistent, then it would be a breach.

[01:04:15] Speaker 04:
But the mandatory dividends rights say, you cannot pay anyone junior to us, the junior preferred say, don't pay anyone junior to us until you pay us.

[01:04:27] Speaker 04:
And that's exactly what the Third Amendment did.

[01:04:29] Speaker 04:
It gave $130 billion to the Treasury beyond its senior preferred dividend.

[01:04:34] Speaker 04:
Some of that had to come to the junior preferred.

[01:04:36] Speaker 04:
Then the common have a provision in their contract that says, you have to pay us rateably with any stock that's equal to us.

[01:04:44] Speaker 04:
Well, their stock is, by definition, equal to the common stock the Treasury would have gotten.

[01:04:48] Speaker 04:
So they should have gotten paid.

[01:04:50] Speaker 04:
That's the substance of what happened.

[01:04:52] Speaker 04:
And their answer to it is,

[01:04:54] Speaker 04:
And it's rather galling, there's no breach of contract because the written terms of the share certificates of the private shareholders have not been altered.

[01:05:05] Speaker 04:
Well, thanks a lot.

[01:05:05] Speaker 04:
We still have a piece of paper with the same words on it, but the words are being completely disregarded.

[01:05:11] Speaker 04:
The words say, you're not going to pay a dividend more than the 10% senior preferred to the Treasury without paying us first.

[01:05:19] Speaker 04:
And people invested on that.

[01:05:22] Speaker 04:
Then they went and said through another, just basically asserted through an amendment, they could have done it through a bylaw.

[01:05:30] Speaker 04:
It doesn't matter.

[01:05:30] Speaker 04:
It's a breach either way.

[01:05:31] Speaker 04:
No matter how they do it, they said, we're going to pay dividends to Treasury beyond its 10%, hundreds of billions of dollars beyond its 10%, without paying you first, even though your contract says you have to get paid first.

[01:05:44] Speaker 04:
That's a breach.

[01:05:46] Speaker 04:
And it's also a breach for the common not to pay them rateably.

[01:05:55] Speaker 04:
In addition, if you look at the substance of all that, there's no way to contest the fact that they materially adversely harmed the interests of these private shareholders without giving them a vote, and their contracts entitled them to a two-thirds vote for any such change.

[01:06:12] Speaker 04:
Again, especially when there's an implied covenant claim, the Delaware and Virginia courts would look at substance and not get caught off in formalisms.

[01:06:21] Speaker 04:
And I think what you're going to hear from the defendants is a lot of formalism.

[01:06:24] Speaker 04:
that should be substance, not form, that governs this case.

[01:06:28] Speaker 04:
And there are cases that say that.

[01:06:30] Speaker 04:
I would refer the court to the Winston v. Mandor Delaware case on page six of our reply brief.

[01:06:36] Speaker 04:
And another case, Price v. State Farm 2013, Delaware Superior, Alexis 102, explicitly says that when there's an applied covenant claim, Delaware courts look at substance over form.

[01:06:47] Speaker 11:
How does the applied covenant work, though, when they can take actions in the interest of the agency as well as the entity?

[01:06:55] Speaker 11:
Well, are there cases that tell us how you do that, how that would work?

[01:06:59] Speaker 04:
Well, that's what I was trying to say at the beginning, that whether the actions were taken in a good faith effort to help the enterprises and help the agency or help the taxpayer, they still have an implied covenant to respect the terms of their contracts that they assumed with the private shareholders.

[01:07:23] Speaker 04:
And so this whole issue of motive that the court was asking Mr. Olson about.

[01:07:27] Speaker 11:
The case is an albeit another context where the Supreme Court has explained that when the United States has a fiduciary duty, that fiduciary duty is infused with its right to act as sovereign.

[01:07:40] Speaker 11:
And acting in its sovereign interests is consistent with its fiduciary duties.

[01:07:45] Speaker 11:
The fiduciary duty for governmental entities is just not the same as it might be for a private fiduciary.

[01:07:51] Speaker 04:
Yes, we encountered that in the Starr case in the Second Circuit, but there's a big difference here.

[01:07:58] Speaker 04:
The FHFA has vigorously asserted, or the Department of Justice has asserted on its behalf, that it is not the government.

[01:08:08] Speaker 04:
In the Court of Federal Claims Takings case, which... Well, I bet you disagree with it.

[01:08:13] Speaker 04:
Well, we're saying that they are the government.

[01:08:19] Speaker 04:
And this was two government agencies colluding.

[01:08:22] Speaker 04:
But they can't have it both ways.

[01:08:25] Speaker 04:
They can't say, we're not the government.

[01:08:26] Speaker 04:
You can't sue us for takings.

[01:08:27] Speaker 04:
Nor can you.

[01:08:27] Speaker 04:
But over here in district court.

[01:08:28] Speaker 11:
But you can't have it both ways either.

[01:08:30] Speaker 11:
So we're going to assume.

[01:08:30] Speaker 04:
I'm pretty sure if I get it one way, I'll win.

[01:08:33] Speaker 11:
Well, that's what I'm asking you.

[01:08:35] Speaker 04:
I only need one way to win.

[01:08:37] Speaker 11:
They need to have it both ways for me not to win.

[01:08:42] Speaker 11:
If they are the United States for these purposes, a federal agency for these purposes, and can take actions in the interest of the agency, in the interest of the United States as sovereign, then how could there be a breach of the implied covenant of good faith on this contract?

[01:08:57] Speaker 11:
It's all conditional rights on treasuries' decisions anyhow.

[01:09:01] Speaker 04:
And most what that would lead to, and they haven't really argued this, but at most what that would lead to, Judge Millett, is that we'd have to bring this implied covenant and breach of contract case in the court of federal claims.

[01:09:12] Speaker 04:
That's the most it would mean, because there's plenty of cases in the court of federal claims with implied covenant claims.

[01:09:17] Speaker 04:
The United States government can breach a contract and be sued for money, and it can breach the implied covenant.

[01:09:23] Speaker 04:
That happens in the Court of Federal Claims.

[01:09:24] Speaker 04:
So I think the line of questioning you have simply says, is about which court I need to go to.

[01:09:28] Speaker 11:
It says if you think they're United States, then does that mean you agree the contract claim shouldn't be here?

[01:09:33] Speaker 04:
No, because they haven't claimed immunity.

[01:09:35] Speaker 04:
And who should?

[01:09:36] Speaker 11:
Well, that would be jurisdictional.

[01:09:38] Speaker 04:
The court did have jurisdiction over, because they didn't claim any immunity, and they're not the government.

[01:09:43] Speaker 11:
If they are the United States, and you're alleging a breach of contract with the United States, then they, as you seem to be arguing the Court of Federal Claims, then the contract claims need to be there, too.

[01:09:52] Speaker 04:
We explained in the very first two pages of our complaint in this case, in the original Patchy Polly complaint, that to some degree, to the extent we're suing FHFA, we're doing it as an alternative claim.

[01:10:08] Speaker 04:
The system set up by Congress requires, normally an alternative claim would be in the same case.

[01:10:14] Speaker 04:
The system created by Congress requires us to do it this way, that

[01:10:18] Speaker 04:
If you agree you're the government, it's a taking.

[01:10:20] Speaker 04:
If you're going to try to say you're not the government, then we have to be in district court.

[01:10:24] Speaker 04:
And by the way, if you are the government, we may have more claims in court of federal claims.

[01:10:30] Speaker 04:
And I would keep in mind also there are breach of contract claims.

[01:10:32] Speaker 04:
I don't want the record to reflect that I've conceded too readily that the defendants on the FHFA side here are governmental, because Fannie and Freddie

[01:10:43] Speaker 04:
still exist.

[01:10:45] Speaker 04:
The FHFA is their conservator.

[01:10:47] Speaker 04:
It runs them.

[01:10:49] Speaker 04:
But Fannie and Freddie are private entities.

[01:10:51] Speaker 04:
They are still getting sued in district courts around the country, and I think the balance of the case law is that they don't get to assert immunity.

[01:10:58] Speaker 04:
So those two entities are still liable for breach of contract, and I don't actually envision any scenario

[01:11:03] Speaker 04:
in which we have to sue them in the court of federal claims.

[01:11:06] Speaker 04:
So I think our claims against them really do belong in district court, not just as an alternative claim, but because Fannie and Freddie are not the government.

[01:11:15] Speaker 04:
The FHFA is a government entity, but the entities it's running are not.

[01:11:19] Speaker 07:
So the government isn't a Delaware corporation.

[01:11:21] Speaker 07:
Amazing.

[01:11:22] Speaker 04:
We're not suing them.

[01:11:25] Speaker 04:
Not yet.

[01:11:26] Speaker 04:
Given its exceptional money-making abilities, it might decide to issue stock.

[01:11:30] Speaker 04:
I don't know.

[01:11:31] Speaker 04:
But we're not suing the Treasury for – well, we are suing the Treasury for breach of fiduciary duty, but we're not suing them for breach of contract.

[01:11:44] Speaker 04:
Thank you very much.

[01:11:54] Speaker 03:
Excuse me, we're going to, the court is going to take a brief recess before the government starts.

[01:12:03] Speaker 03:
Thank you.

[01:12:04] Speaker 07:
We may or may not be back.

[01:12:14] Speaker 01:
Do not turn on your cell phone.

[01:12:31] Speaker ?:
th th

[01:13:13] Speaker ?:
th th

[01:13:38] Speaker ?:
th th th

[01:14:16] Speaker 08:
th th

[01:14:58] Speaker ?:
Thank you very much.

[01:15:27] Speaker ?:
th th

[01:15:56] Speaker 01:
Please find your seats, please.

[01:16:08] Speaker 01:
Please find your seats when you're ready to get started.

[01:16:59] Speaker ?:
This is the mic in the first place.

[01:17:23] Speaker ?:
Is it going off?

[01:18:28] Speaker 00:
Stand, please.

[01:18:45] Speaker 09:
May it please the court, Howard Kane, our Federal Housing Finance Agency, Fannie Mae, and Freddie Matt.

[01:18:52] Speaker 09:
Your Honors,

[01:18:54] Speaker 09:
Judge Lamberth's decision should be affirmed actually now based on a notice we were provided by the court earlier today for three independent reasons.

[01:19:07] Speaker 09:
First, a statutory jurisdictional bar precludes review of plaintiff's claim.

[01:19:14] Speaker 09:
In addition to the bar laid out in our statute, Your Honors, the statute referenced in the court notice to counsel also fully precludes each and every claim in this matter seeking relief, Your Honors.

[01:19:29] Speaker 07:
So you overlooked a dispositive jurisdictional bar in this case?

[01:19:33] Speaker 07:
You overlooked a dispositive judicial jurisdictional bar.

[01:19:40] Speaker 09:
Your honor, as in many litigations, this case morphed over time.

[01:19:45] Speaker 09:
And

[01:19:51] Speaker 09:
I would, I said to my colleagues, I applauded the member of the panel or the clerk who saw this, but it just supplements what we have said because, let me just get to this.

[01:20:05] Speaker 07:
So you're saying the equitable, pardon me, the Third Amendment, that's what we're talking about, the Third Amendment was a discretionary, supervisory action?

[01:20:14] Speaker 09:
No, Your Honor, let me tell you, say the Court, and this is what

[01:20:20] Speaker 09:
was it so clear in the complaints, but as the case is developed and we heard this morning plaintiffs essentially allege that the FHFA is violating all sorts of rules, laws, regulations, safe and sound banking practices by allowing these institutions to operate with as little as zero capital.

[01:20:49] Speaker 09:
That is the point that this statute gets to, Your Honor, because as you court will know from the statute, it says that if the agency as regulator, and again, Your Honor, when we file our papers, we are focusing on the conservatorship allegations and the complaints, but when the agency is regulator,

[01:21:13] Speaker 09:
reclassifies or changes capital classifications that might be challenged but beyond that anything relating to a change capital classification according to the statute is not subject it may not be affected in any way by

[01:21:34] Speaker 09:
in order of any court.

[01:21:36] Speaker 09:
So what we had here at the outset in 2008, at the time the institutions were put into conservatorship, a new capital paradigm was established.

[01:21:47] Speaker 09:
And that capital paradigm said, as long by the director of the agency as regulator.

[01:21:53] Speaker 09:
And that capital paradigm said, as long as these institutions are not forced into mandatory receivership,

[01:22:05] Speaker 09:
they may operate.

[01:22:07] Speaker 09:
And the new paradigm was, rather than requiring them to maintain 8%, 5%, 6% capital, whatever the standard was, as a normal banking institution, it was determined that as long as the Treasury commitment was out there, ready to come in to cure any insolvency which

[01:22:32] Speaker 09:
As the court knows, if the institutions were insolvent for more than 60 days, the agency would have been forced to place them into mandatory receivership.

[01:22:42] Speaker 09:
So the new paradigm was, we'll have these 100, 200, eventually Treasury committed to $467 billion, virtually nearly a half a trillion dollars, to support these enterprises.

[01:22:56] Speaker 09:
And the regulator made the regulatory decision that

[01:23:02] Speaker 09:
We will the agency will allow that to satisfy capital standards.

[01:23:07] Speaker 09:
So again, this way it was not challenged at the time.

[01:23:11] Speaker 09:
And so what the statute said is says is that this

[01:23:17] Speaker 09:
action by the agency as regulator to establish a new capital paradigm for the duration of the conservatorships may not be affected by injunction or otherwise in any manner.

[01:23:32] Speaker 09:
It's similar to, on the banking side in here, and the banking side is 120 CH and 18 I, no court may effect by injunction or otherwise

[01:23:42] Speaker 09:
a cease and desist order that has been issued.

[01:23:45] Speaker 09:
What was happening here, and there's case law on this, this provision essentially parrots what are called, on the banking landscape, capital directives.

[01:23:57] Speaker 09:
Capital directives were first enacted by Congress in 1983, pursuant to the International Lending Supervision Act of 1983.

[01:24:07] Speaker 09:
And what a capital directive, and it was issued, Your Honors,

[01:24:10] Speaker 09:
in response to a Fifth Circuit decision.

[01:24:13] Speaker 09:
The Fifth Circuit, back in 1983, in a case called Comptroller Currency versus First National Bank of Bel Air, ruled that the Comptroller's cease and desist order requiring a bank to increase its capital was not supported by substantial evidence.

[01:24:31] Speaker 09:
And to overrule that decision, the Congress enacted what are called capital directives, and capital directives provide that the agencies, the Comptroller, the FDIC, the Fed, the NCUA, I believe, can

[01:24:49] Speaker 09:
require institutions to maintain whatever capital level they deem appropriate under the circumstances.

[01:24:59] Speaker 09:
And this was the key point, those determinations are subject to no judicial review.

[01:25:06] Speaker 09:
In 1990, that point that they were subject to no judicial review was challenged

[01:25:14] Speaker 09:
in the Fifth Circuit in a case called FDIC versus Banca Cachada, reported at 930, Fed 2nd, 1122.

[01:25:27] Speaker 09:
And on a three-judge Fifth Circuit panel, including the esteemed Judge John Minor Wisdom, the Court ruled that

[01:25:41] Speaker 09:
the statute comported with due process.

[01:25:44] Speaker 09:
There's a lengthy analysis, and the statute, the capital director statute at issue there that provided no judicial review to banks when the agencies changed, increased, decreased their capital guidelines was not subject to judicial review.

[01:26:01] Speaker 09:
Your Honors, that is precisely

[01:26:04] Speaker 09:
what is implicated by the statute that the court has referenced.

[01:26:07] Speaker 11:
So your view here is that they're challenging this what you call capital paradigm that was created here of, in the third amendment, getting rid of obligations that

[01:26:22] Speaker 11:
that the GSE has had under the prior amendments and the PSPAs and replacing them with this just pay us whatever you can each month.

[01:26:32] Speaker 11:
That's a new capital paradigm decision by the director?

[01:26:35] Speaker 09:
No, what I'm referring to, Your Honor, is the

[01:26:39] Speaker 09:
It's throughout the briefs that came up in my esteemed colleague Mr. Olson's presentation many times that the agency is driving these institutions out of business.

[01:26:53] Speaker 09:
It's allegedly not allowing them to grow capital.

[01:26:57] Speaker 09:
It's keeping them at zero.

[01:26:58] Speaker 09:
How can that be?

[01:27:00] Speaker 09:
Well, the reason that can be is the paradigm, the new capital program that never has been challenged

[01:27:09] Speaker 09:
that was established in 2008 sets precisely that.

[01:27:16] Speaker 09:
An action was taken by the director at that time in September 2008 that said, going forward, the normal

[01:27:25] Speaker 09:
capital classifications, whatever the percentage was, I recall, 3, 4, 5, 6, 7, 8% no longer apply.

[01:27:32] Speaker 09:
Instead, we're going to have this new paradigm.

[01:27:35] Speaker 09:
And the new paradigm is, and we all have to understand, much of the presentation by my colleagues is like we're dealing with this fabulously successful financial institution, and the shareholders are being

[01:27:52] Speaker 09:
stripped of their rights.

[01:27:54] Speaker 09:
But what we're dealing with are institutions which we all recall that in 2008 were on the verge of insolvency and they were threatened with receivership which would have had massively

[01:28:10] Speaker 09:
adverse consequences on the national mortgage markets.

[01:28:14] Speaker 09:
So, Congress passed special legislation, and this legislation, and I apologize for just skipping a bit, but this legislation

[01:28:27] Speaker 09:
is with respect to the matters that we hear about conflicts.

[01:28:30] Speaker 09:
This legislation was actually included in the Charter Acts, the Charter Act of Fannie Mae, the Charter Act of Freddie Mac.

[01:28:39] Speaker 09:
So this is both federal law and this is in the governing corporate instruments of these institutions.

[01:28:46] Speaker 09:
This ability, authority of Treasury to infuse massive amounts of taxpayer dollars

[01:28:54] Speaker 11:
And so what we have is... So the argument is, as I understand it, is the paradigm that you had was in 2008 and going forward to, up to and through the third amendment, the director's decision was,

[01:29:10] Speaker 11:
No way do we want this going into mandatory receivership.

[01:29:14] Speaker 11:
No way do we want that happening.

[01:29:15] Speaker 11:
We must prevent that from happening.

[01:29:17] Speaker 11:
We do not want receivership because of the enormous consequences that would have for the economy, the treasury.

[01:29:26] Speaker 11:
Hook up the hose and we're gonna have the money running in and do whatever we have to avoid, we can, whatever we have to do to avoid receivership.

[01:29:36] Speaker 11:
Is that, and that was their decision, the director's decision as

[01:29:40] Speaker 11:
conservator that's what that's what was going on here.

[01:29:43] Speaker 09:
That was the agreement your honor was executed between the enterprises so it was authorized the enterprises and treasuries so it was authorized by the federal housing finance agency in its capacity as conservator and getting back to Judge Ginsburg's questions that's why

[01:30:05] Speaker 09:
Our briefs rely on the withdrawal of jurisdiction that would apply or bar a court from effecting the operations of a conservator.

[01:30:18] Speaker 09:
With respect to the court's inquiry to counsel this morning, the reason I'm referring to the FHFA as regulator is it was the FHFA as regulator that made the regulatory decision that going forward, the capital tests

[01:30:38] Speaker 09:
that previously had applied to these enterprises were off the boards for the indefinite future for the duration of the conservatorship.

[01:30:47] Speaker 09:
Instead, as I said, the agency's regulator

[01:30:55] Speaker 09:
in that capacity, authorize this new capital paradigm, which is Treasury, the conservator on behalf of the enterprises will enter into an agreement with the Department of Treasury pursuant to which

[01:31:11] Speaker 09:
the department will commit literally hundreds of billions of tax dollars to the infusion and to the support of these enterprises.

[01:31:22] Speaker 09:
And that will satisfy any capital requirement we as regulators believe is necessary.

[01:31:31] Speaker 09:
And my point simply with respect to the court's inquiry is the whole range of relief

[01:31:38] Speaker 09:
being sought by plaintiffs here.

[01:31:42] Speaker 09:
if were granted, would directly contradict, undermine, effectively set aside that regulatory decision by the agency.

[01:31:56] Speaker 09:
Just one specific, what my esteemed colleague Mr. Olson is asking for is that the court issue some type of relief to force these enterprises to increase their capital to some arbitrary level.

[01:32:11] Speaker 09:
Well, again, that may happen or not, but it's not consistent with the action taken by the director, which focuses on keeping these entities in business.

[01:32:29] Speaker 09:
And the court had, there was much back and forth in the context of

[01:32:35] Speaker 09:
fiduciary powers, fiduciary interest relating to the statutory provision that the agency as conservator now can take action in the best interest of the enterprises or in the best interests of the agency.

[01:32:52] Speaker 09:
If I may submit, what that means is

[01:32:59] Speaker 09:
These are very unique creatures.

[01:33:02] Speaker 09:
They are, as the Court has noted, massive financial institutions, but these are not comparable to standalone banks or standalone savings and loans, because Congress had a more fundamental purpose.

[01:33:17] Speaker 09:
Congress's purpose in enacting and authorizing these financial institutions wasn't just to have two more banks, it was to provide

[01:33:28] Speaker 09:
support to facilitate the operation of the national mortgage markets.

[01:33:35] Speaker 09:
That was a policy decision by Congress.

[01:33:38] Speaker 09:
Congress considered it absolutely essential that those markets operate and they operate efficiently.

[01:33:45] Speaker 09:
And that was the purpose for these enterprises.

[01:33:49] Speaker 09:
So under circumstances such as 2008, now, whenever, the

[01:33:59] Speaker 09:
conservator may well determine, well, I have a particular choice to make.

[01:34:05] Speaker 09:
I can run things to try to make this more profitable, or I can run things to maximize the ability of the enterprise to facilitate the operation of those markets.

[01:34:20] Speaker 09:
Congress made the policy judgment to allow the conservator, without interference by shareholders with all respect, without interference by the judiciary, to make that decision.

[01:34:34] Speaker 09:
And what we have here, getting back to what's being challenged, again,

[01:34:41] Speaker 09:
We have to look everything in the context.

[01:34:43] Speaker 09:
What is we have here are the shareholders are effectively asking this court to override the conservators judgment.

[01:34:57] Speaker 09:
And this is judgment.

[01:34:58] Speaker 09:
Congress decided this is the agency.

[01:35:01] Speaker 09:
This is the expert.

[01:35:02] Speaker 09:
We want to rely on the agency and the agency's conservator.

[01:35:06] Speaker 09:
The net effect of what is being asked of this court is to second guess the decisions made by the conservator on how it will handle, marshal, administer this nearly half a trillion dollars

[01:35:27] Speaker 09:
of taxpayer funds.

[01:35:29] Speaker 09:
And again, the record is clear, and I'll refer to the statute in a moment.

[01:35:34] Speaker 09:
Congress put that money in clearly not to benefit shareholders of an institution that months later became insolvent.

[01:35:46] Speaker 09:
They put it in because the bottom had fallen out of the world and the United States national economy.

[01:35:55] Speaker 09:
And Congress believed, this is in their judgment, that if the national mortgage market fails, becomes non-operational, that will just make a horrible situation so much worse.

[01:36:15] Speaker 11:
And that is why... Well, I think what they would say is, what's happening here, what they have said is,

[01:36:24] Speaker 11:
in this situation what the FHFA is doing doesn't look like what conservators usually do.

[01:36:31] Speaker 11:
It doesn't look like they're getting it back in a solvent condition if it can never have a penny profit.

[01:36:38] Speaker 11:
And on the other hand, the liquidation hasn't started.

[01:36:44] Speaker 11:
You're sort of in this limbo on life support here.

[01:36:49] Speaker 11:
trying to figure out how that fits into the statutory scheme as to what, because Congress did choose to call them conservators and distinguish conservators from receivers, so how do you deal with that?

[01:36:58] Speaker 09:
Well, Your Honor, this, everything that's happening goes to really, I'll call it the heartland, the heartland of the conservators' statutory powers.

[01:37:11] Speaker 09:
And there's a lot of discussion that

[01:37:14] Speaker 09:
conservatives and receivers are polar opposites.

[01:37:18] Speaker 09:
They have a whole different set of powers and duties.

[01:37:21] Speaker 09:
That's just not the case.

[01:37:23] Speaker 09:
Except for the fact that a receiver is authorized by statute to liquidate, the statutory powers of both are identical.

[01:37:35] Speaker 09:
You just have to look at the statute to see that.

[01:37:37] Speaker 09:
They both have the power to

[01:37:40] Speaker 09:
operate just every term is the same except then there's an a follow-up provision additional powers of receiver and it says the receiver can liquidate but what we're having here some other obligations to write about notice

[01:37:57] Speaker 09:
of course, Congress made an exception to the succession statute because the succession statute applies both to the conservator and to the receiver.

[01:38:10] Speaker 09:
So in other words, in a conservatorship or a receivership, all the powers of the shareholders, the officers, the directors, anything

[01:38:21] Speaker 09:
over the assets, the powers, anything related to the institution for both a conservator and a receiver is by operation of law assigned to the conservator or the receiver upon the institution of any of those

[01:38:37] Speaker 09:
situations, an institution of receivership, an institution of conservatorship.

[01:38:42] Speaker 09:
As we point out in our briefs, when all of that is assigned to, transferred to, when the conservator succeeds to it,

[01:38:52] Speaker 09:
There is no exception to that.

[01:38:55] Speaker 09:
The conservator succeeds to everything.

[01:38:59] Speaker 09:
But in contrast, in receivership, there is a single exception.

[01:39:05] Speaker 09:
And the single exception is, in receivership, not withstanding the fact that everything has also been transferred to the receiver,

[01:39:14] Speaker 09:
claimants against the institution, including shareholders, may file administrative claims pursuant to a comprehensive claim process established by the statute with ultimate review in the federal courts.

[01:39:33] Speaker 09:
that really deals with many of the arguments about conflicts and looking for exceptions.

[01:39:38] Speaker 09:
Congress knew how to draw an exception on these statutes when it wanted.

[01:39:41] Speaker 09:
In receivership, it did give an exception.

[01:39:44] Speaker 09:
And the exception was a claimant can file a claim in receivership.

[01:39:48] Speaker 09:
In conservatorship, which may lead or often leads to receivership, claims cannot be filed.

[01:39:54] Speaker 09:
But Your Honor, I apologize for digressing, because the Court's question was about

[01:40:02] Speaker 09:
What is a conservator authorized to do?

[01:40:04] Speaker 09:
And there's a lot of papers filed.

[01:40:07] Speaker 09:
Well, this doesn't look like any conservatorship any of the filers have ever seen.

[01:40:12] Speaker 09:
Well, it's different because there have never been institutions with, as the courts indicate, $5 trillion of assets that were becoming insolvent.

[01:40:27] Speaker 09:
And typically in the bank context,

[01:40:32] Speaker 09:
An institution that is failing may sometimes be put in conservatorship to give the regulator a chance to determine, can this business be saved?

[01:40:45] Speaker 09:
Sometimes it can.

[01:40:47] Speaker 09:
Usually it can't.

[01:40:49] Speaker 09:
And when it can't, then it goes to receivership.

[01:40:52] Speaker 09:
But there is nothing in the bank statutes or in our statute that says,

[01:40:57] Speaker 09:
the regulator has to determine within blank days, blank weeks, blank years, how long the conservatorship will last.

[01:41:06] Speaker 09:
But when you go back to the underlying reason that motivated Congress to authorize these enterprises, to empower them, that

[01:41:19] Speaker 09:
we want to facilitate the operation of the national mortgage markets, then it's very understandable, then it's very consistent.

[01:41:31] Speaker 09:
entities are being operated in conservatorship for the purpose of facilitating those markets.

[01:41:38] Speaker 09:
As the court now knows, we have affirmative legislation from Congress that says, at least through 2018, we want this status to stay.

[01:41:47] Speaker 09:
We don't want anything changed.

[01:41:50] Speaker 09:
We want these entities to remain in conservatorship until we, Congress, decide what the next step is.

[01:41:58] Speaker 09:
And that, Your Honor, refers

[01:42:00] Speaker 09:
relates back to a question you asked earlier about.

[01:42:04] Speaker 09:
statements made by Congress about what happens next, and then Congress also said even after 2018, please understand that it is the sense of Congress that this status should continue until we, Congress, get around to doing something about it.

[01:42:22] Speaker 09:
And just another aspect of that, when you think about what Congress did there, Congress by statute

[01:42:31] Speaker 09:
essentially directly mandated that the Department of Treasury continue to hold the shares it holds today, at least under 2018.

[01:42:42] Speaker 09:
So Congress is telling Treasury, continue to hold the shares, these shares which are governed by the Third Amendment now, until that date.

[01:42:54] Speaker 09:
To me, and I know they put in a couple statements from legislative history, you can't

[01:43:00] Speaker 09:
understand that provision without recognizing that congress was in fact signing off on the current structure of the shares because we know from the regulators they thought that... What does the 2016 act's direction, how would that affect any remedy that's asked for in this case?

[01:43:27] Speaker 11:
Or not at all?

[01:43:28] Speaker 09:
I would

[01:43:31] Speaker 09:
suggested it in of itself and we have to spend some time evaluating this but it certainly could be argued that we're not relying on it but it certainly could be argued that the 2016 act would bar this court from making any change to the attributes of the shares held by Treasury because Congress has in a legislative act said

[01:44:00] Speaker 09:
you must hold these shares as presently constituted, and if this Court were to go back to the Second Amendment,

[01:44:10] Speaker 09:
That's not what Congress told Treasury to hold.

[01:44:14] Speaker 11:
As presently constituted, does that mean those shares, as presently constituted, include a dividend equal to 100% of any profits?

[01:44:22] Speaker 09:
Is that the theory, or is it that they've got their shares, but processes can still... No, no, that's a term of the shares, because again, we have to go back to the underlying agreements.

[01:44:33] Speaker 11:
The whole purpose is to... How could that be a term of the shares because they didn't buy any shares in 2016?

[01:44:39] Speaker 11:
I'm sorry.

[01:44:40] Speaker 11:
They didn't buy any shares.

[01:44:41] Speaker 11:
Their argument is they didn't acquire any shares.

[01:44:44] Speaker 09:
That's correct.

[01:44:44] Speaker 09:
There were no new shares, but certain of the terms governing the shares changed.

[01:44:50] Speaker 09:
That's what the Third Amendment did.

[01:44:52] Speaker 09:
It changed some terms.

[01:44:54] Speaker 09:
And those terms and the shares that Congress said the Treasury must hold,

[01:45:01] Speaker 09:
were governed by the terms of the PSPAs as amended by the first, second, and third amendments.

[01:45:11] Speaker 09:
So that's what Congress had in front of it.

[01:45:13] Speaker 09:
That's what Congress told Treasury to hold.

[01:45:16] Speaker 09:
And also, Your Honor, though, we hear lots of discussion that this was a takeaway.

[01:45:23] Speaker 09:
This is awful.

[01:45:25] Speaker 09:
This is a seizure of assets.

[01:45:27] Speaker 09:
Well, first, as I mentioned,

[01:45:30] Speaker 09:
And the legislation that's part of the Charter Act, it required Treasury to make

[01:45:38] Speaker 09:
a three-step emergency determination before it agreed to infuse these funds.

[01:45:45] Speaker 09:
And that three-step determination required Treasury to consider market stability, to prevent disruptions in the availability of mortgage finance, and to protect taxpayers.

[01:45:58] Speaker 09:
That was it.

[01:45:58] Speaker 09:
It wasn't about protecting shareholders.

[01:46:03] Speaker 09:
And yes, Your Honor.

[01:46:04] Speaker 03:
That was Treasury, right?

[01:46:06] Speaker 03:
Which was lending its money, and Treasury was not the conservator.

[01:46:11] Speaker 09:
That's correct, Your Honor, but this is the provision that is in the Charter Act of the two enterprises, and it says Treasury may infuse this money on such terms as Treasury directs, and it says that the enterprise, now the conservator, may agree to that.

[01:46:31] Speaker 03:
And what they first agreed to, as I understand the Second Amendment, right, was that they would have dividends and that they had a warrant to buy up to 80 percent of the common stock.

[01:46:45] Speaker 03:
Is that correct?

[01:46:46] Speaker 03:
And so presumably Treasury was acting under that mandate when it made the Second Amendment.

[01:46:54] Speaker 09:
If I may respectfully correct something the Court just said, and I'm not surprised the Court said it because it's consistent with the presentation of plaintiffs.

[01:47:08] Speaker 09:
When you read, for example, the class action briefs, you would think the original transaction was the exchange

[01:47:17] Speaker 09:
of one stream, the dividend that was $19 million, and that was it.

[01:47:22] Speaker 09:
That is not the case.

[01:47:25] Speaker 09:
There was a second stream, it was called the periodic commitment fee, and that had been waived for three years, but the periodic commitment fee

[01:47:36] Speaker 09:
which was a term included in the initial agreement was sufficiently significant that subsequent to the enactment, subsequent to the execution of these agreements, the United States Congress passed special legislation called the Paid Back Act

[01:47:57] Speaker 09:
that provided any and every dollar ever paid pursuant to the periodic commitment fee must be directed to the pay down of the national debt.

[01:48:11] Speaker 09:
And I'm not staying here arguing to the court.

[01:48:14] Speaker 09:
Would this have net-net been more than all the profits?

[01:48:17] Speaker 09:
It would have been less than all the profits.

[01:48:19] Speaker 09:
But it's something that plaintiffs should have presented.

[01:48:23] Speaker 09:
If you look at the class action brief, you'll see captions.

[01:48:26] Speaker 09:
Treasury was given the right, captions of their full sections, Treasury was granted the right to all future profits for zero, no consideration.

[01:48:43] Speaker 09:
Well, that's just not true.

[01:48:44] Speaker 09:
There was the $19 million, and there was this periodic commitment fee.

[01:48:49] Speaker 09:
And if the court were to

[01:48:52] Speaker 09:
Look, you'll see from 2010 through the time that the Third Amendment was signed, there are a series of letters from the Department of the Treasury to the Federal Housing Finance Agency, each of which states, and again, this is inconsistent with any kind of profit grab going on,

[01:49:11] Speaker 09:
each of which states that due to the adverse economic circumstances of the national mortgage markets, we, the Department of Treasury, waive for this quarter our right to a fee pursuant to the periodic commitment fee.

[01:49:29] Speaker 09:
And just to look at the terms of that fee, it says, and this is right in the agreement,

[01:49:35] Speaker 09:
The periodic commitment fee was intended to compensate the taxpayers for the market value of the remaining commitment by the Department of Treasury.

[01:49:47] Speaker 09:
And we hear a lot in the briefs and in the discussions this morning to the effect that, oh, well, everything's been paid back and more.

[01:49:58] Speaker 09:
And so this is all behind us.

[01:49:59] Speaker 09:
No, no, no, no.

[01:50:01] Speaker 09:
$189 billion into the two enterprises is what, through today, has been infused.

[01:50:09] Speaker 09:
But as of today, and into perpetuity until these conservatorships are wound down, the United States Treasury remains obligated to infuse up to $258 billion to assure that these institutions

[01:50:30] Speaker 09:
based on something that happens tomorrow, next week, next year, don't face receivership again.

[01:50:36] Speaker 09:
So this periodic commitment fee that class plaintiffs ignore, not once do they mention it,

[01:50:44] Speaker 09:
It is supposed, if it was assessed... How much would that have been?

[01:50:48] Speaker 11:
If it hadn't been waived, or going forward, if you didn't have that abandonment of the Third Amendment, how much would that have been?

[01:50:56] Speaker 11:
Your Honor, as I said, I have... How much were the ones that you waived?

[01:51:00] Speaker 09:
I'm sorry.

[01:51:01] Speaker 11:
How much were the commitment fees that were waived?

[01:51:04] Speaker 09:
The commitment fee has never been determined.

[01:51:07] Speaker 09:
All I'm saying is, had the Third Amendment not been executed,

[01:51:14] Speaker 09:
Treasury was giving up not only the right to the $19 billion, it was giving up the right to the periodic commitment fee, which was, under the terms of the agreement, intended to reflect the value of this.

[01:51:29] Speaker 11:
Does anyone have any sense of how much that would have been worth?

[01:51:32] Speaker 09:
The only sense I have, Your Honor, is the fact that Congress passed the legislation indicates, well, they thought it was worth, it was significant enough to pass special legislation to do.

[01:51:45] Speaker 09:
But to be clear, even if there wasn't a periodic commitment fee, there's nothing to examine in this transaction because the great bulk of the discussion between the Court and Council this morning had to do with

[01:52:00] Speaker 09:
Well, what does this term mean and was this a good deal or a bad deal?

[01:52:05] Speaker 09:
Well, I'll stipulate for this purpose.

[01:52:08] Speaker 09:
Let's just stipulate that it was a bad deal.

[01:52:11] Speaker 09:
And in retrospect, something else should have been agreed to.

[01:52:16] Speaker 09:
But this is not an APA case under any arbitrary and capricious or other standard.

[01:52:23] Speaker 09:
The only

[01:52:26] Speaker 09:
issue for this court to resolve is whether the conservator exercised the power granted by Congress and that in this case is a simple determination because the conservator exercised the power, the power to operate the institutions, the power to enter into contracts when it executed the original agreement in 2008 and

[01:52:53] Speaker 09:
And that has never been challenged.

[01:52:54] Speaker 09:
And what are we dealing with here?

[01:52:56] Speaker 03:
We're dealing with an amendment.

[01:52:56] Speaker 03:
Well, what if that's not actually the question here?

[01:53:00] Speaker 03:
What if the question is not whether the conservative exercised the power, but whether the power that they exercised was the power authorized by the statute or whether they acted ultraviolet?

[01:53:14] Speaker 09:
Right.

[01:53:14] Speaker 09:
Yes, your honor.

[01:53:15] Speaker 09:
And the power that I'm suggesting that was exercised here was the power to operate the institutions.

[01:53:25] Speaker 09:
The determination was made that without these agreements,

[01:53:30] Speaker 09:
the institutions couldn't operate at all because they go into mandatory receivership, and down the road, as is laid out in great detail in our colleagues' briefs from the Department of Justice, a determination was made that if we leave things as they are, there may be a lot of periods, or some periods, where the $19 billion dividend exceeds the amount of profits for that year, which will

[01:53:58] Speaker 09:
have the effect of reducing the Treasury commitment and perhaps shorting the life, giving less backup support.

[01:54:08] Speaker 09:
And that was a paradigm of a business judgment.

[01:54:14] Speaker 09:
The business judgment was made by the conservator that this new arrangement will better allow the preservation of the commitment.

[01:54:24] Speaker 09:
And for purposes of the court's analysis,

[01:54:28] Speaker 09:
I would, the Court should consider, well, that was clearly a wrong judgment.

[01:54:33] Speaker 09:
Maybe the Second Amendment was better.

[01:54:35] Speaker 09:
Maybe a Fourth Amendment with a different paradigm would be better.

[01:54:39] Speaker 09:
But that is the heartland of what Congress said.

[01:54:42] Speaker 09:
We are a power that we are investing in the

[01:54:48] Speaker 09:
conservator that we don't want to authorize third parties or shareholders or courts to challenge.

[01:54:55] Speaker 09:
We want this to operate as a business.

[01:54:59] Speaker 07:
When you started your argument, I thought you were saying that the only question before the court, the only one we need answered, arises under 4623.

[01:55:14] Speaker 07:
And I asked you whether this was a situation in which there had been a discretionary supervisory action.

[01:55:25] Speaker 07:
And I think you said, no, this was a reclassification.

[01:55:30] Speaker 07:
of the capital structure?

[01:55:34] Speaker 09:
I've spoken way too long and I forget most of what I've said already, Your Honor, but the way I would answer the question now, what I would say now, what it was is there used to be a capital system that said the enterprises had to have capital based on certain percentages and calculations, and that system was

[01:55:55] Speaker 09:
eviscerated, eliminated as it applied to the enterprises in its totality, and instead there was a new system, and the new system was... I think you used the word paradigm.

[01:56:06] Speaker 09:
Yeah, it's a new paradigm.

[01:56:07] Speaker 09:
Yes, yes, Your Honor, I did.

[01:56:08] Speaker 09:
The new paradigm is a treasury of support.

[01:56:10] Speaker 07:
You raised that in connection or in response to

[01:56:16] Speaker 07:
The courts having asked you to address Section 4623.

[01:56:19] Speaker 07:
Yes, Your Honor.

[01:56:22] Speaker 07:
Section 4623 counts and addresses two types of decisions.

[01:56:27] Speaker 07:
It says a regulated entry that is not classified as critically undercapitalized and is the subject of a classification change, that's one action, or of a discretionary supervisory action taken under this sub-tab by the Director, that's a second one.

[01:56:42] Speaker 07:
Now, I asked you if this was a discretionary, supervisory action, and I thought you said it was a change, because of this paradigm point, it was a change in the classification with respect to its capital.

[01:56:55] Speaker 09:
Change in the system that applied to the measurement.

[01:56:58] Speaker 07:
Okay, change in the system.

[01:56:59] Speaker 07:
Yes.

[01:56:59] Speaker 07:
But what the words are is the subject of a classification, okay?

[01:57:04] Speaker 07:
So there seems to be in the statute a whole system, a whole typology of classifications, adequately capitalized and then under-capitalized, and within that, significantly under-capitalized, critically under-capitalized.

[01:57:24] Speaker 07:
Was there a change?

[01:57:25] Speaker 09:
Yes, Your Honor, that entire system

[01:57:28] Speaker 09:
by virtue of the director's action was set aside.

[01:57:32] Speaker 09:
There is an issue that's by the director that says this system doesn't apply.

[01:57:35] Speaker 07:
Setting it aside is not making a change within the grid, it's moving off that grid, right?

[01:57:39] Speaker 09:
Well, I would say that it's before that change,

[01:57:44] Speaker 09:
institution, you have to apply with this, comply with this, now you have to comply with that.

[01:57:50] Speaker 07:
Okay, so if it's not a change in this menu that's given here, then it's a discretionary supervisory action.

[01:57:57] Speaker 07:
Those are the only two possibilities under 4623, if you think 4623 is a jurisdictional violation.

[01:58:03] Speaker 09:
And Your Honor, I'm just at a slight disadvantage because I didn't know this was going to come up.

[01:58:07] Speaker 09:
I don't have that statute in front of me.

[01:58:09] Speaker 09:
You addressed it

[01:58:09] Speaker 09:
I read it before I walked in, Your Honor, on an iPhone.

[01:58:16] Speaker 09:
But may I?

[01:58:18] Speaker 09:
Thank you.

[01:58:29] Speaker 07:
I can't see anything.

[01:58:34] Speaker 09:
And what I'm looking at is

[01:58:38] Speaker 11:
I think the question is whether this is an action of the director under this sub-chapter within the meaning of 4623.

[01:58:45] Speaker 09:
Yes, I'm just looking right now for the withdrawal language in the statute, Your Honor.

[01:58:50] Speaker 09:
It's in D. D?

[01:58:53] Speaker 09:
Okay.

[01:58:55] Speaker 09:
So...

[01:58:58] Speaker 09:
So it says, the withdrawal, and this is what I was comparing to the withdrawal under the capital directives and under the cease and desist proceedings for banking agencies, where it says, except as provided in the section, no court shall have jurisdiction to effect by injunction or otherwise the issuance or effectiveness of any classification or action of the director under the subchapter.

[01:59:24] Speaker 09:
And a suggestion, Your Honor,

[01:59:27] Speaker 09:
is that the issuance of a directive saying capital classifications no longer apply during conservatorship was an action under

[01:59:42] Speaker 09:
12 U.S.C.

[01:59:43] Speaker 09:
section 4623 that the court, or any court, has no jurisdiction to affect by injunction or otherwise.

[01:59:51] Speaker 07:
Just to be clear, not because it was a change of classification, but because it was a supervisory action putting the whole classification scheme to one side.

[01:59:59] Speaker 07:
I wouldn't disagree with that statement, Your Honor.

[02:00:02] Speaker 07:
Yes, okay.

[02:00:02] Speaker 07:
Thank you.

[02:00:06] Speaker 09:
You have the statute?

[02:00:06] Speaker 09:
Thank you.

[02:00:06] Speaker 09:
Thank you very much.

[02:00:07] Speaker 09:
I should have been better prepared to apologize.

[02:00:08] Speaker 09:
Well, you didn't have much notice.

[02:00:11] Speaker 09:
Sorry.

[02:00:16] Speaker 11:
I think if Council want to submit supplemental briefs on that, that would be.

[02:00:19] Speaker 09:
Your Honor, we'd be obviously pleased to submit supplemental briefs, but we obviously think the answer is clear, but we'd be happy to document it.

[02:00:31] Speaker 09:
All right.

[02:00:35] Speaker 09:
Unless there are any other questions, I will say.

[02:00:37] Speaker 02:
We think we understand your argument.

[02:00:38] Speaker 02:
Thank you, Your Honor.

[02:00:40] Speaker 02:
Mr. Stern?

[02:01:17] Speaker 06:
this morning, and I'm primarily here at this point to answer the questions that have been raised in the court's mind by the briefs and the preceding colloquies.

[02:01:35] Speaker 06:
Obviously, there's been lots of discussion in and out of what

[02:01:41] Speaker 06:
of the merits of some of these claims.

[02:01:44] Speaker 06:
In the state of the obvious, the question that's presented by Judge Lambert's opinion is whether the two critical provisions of HERA, the explicit bar on judicial review and the transfer of rights provision,

[02:02:06] Speaker 06:
the plaintiffs have advanced a number of theories for why this court should imply an exception.

[02:02:22] Speaker 06:
in light of sort of the particulars of what was before Congress.

[02:02:27] Speaker 06:
Because yes, this does come from the Thyria.

[02:02:30] Speaker 06:
Yes, the Thyria case law is relevant.

[02:02:33] Speaker 06:
But this is also a very particular kind of instance which was going to be applied.

[02:02:38] Speaker 06:
And Congress understood what was going to be happening here.

[02:02:42] Speaker 06:
But this is very different from the broad application of the judicial sort of removal

[02:02:52] Speaker 06:
that are going to come up sort of, you know, in a whole variety of unforeseen context.

[02:02:59] Speaker 06:
I mean, what Congress knew in particular, whatever the sort of ultimate scope of these provisions is, the one thing that we know is that this was all enacted as part of Congress addressing institutions that are undisputably failing.

[02:03:16] Speaker 06:
And this was the fact that we're here today at all is the result of this legislation.

[02:03:22] Speaker 07:
Well, plaintiffs have suggested that there was some internal disagreement as to whether they were failing.

[02:03:29] Speaker 07:
It wasn't undisputed.

[02:03:30] Speaker 06:
Oh, I'm sorry, Your Honor.

[02:03:31] Speaker 06:
I was referring to the original 2008, which just in terms of trying to understand how we should be interpreting these provisions.

[02:03:42] Speaker 06:
Because one thing that Congress understood was that there was going to be an enormous amount of taxpayer money

[02:03:54] Speaker 06:
I mean, looking back at a lot of the things that happened in 2008, it's easy to forget what it all looked like to regulators and Congress at the time and the extent to which the government was being criticized for putting gigantic amounts of money at risk with no guarantees of return.

[02:04:15] Speaker 06:
And one thing Congress understood was that there was going to be this massive infusion and it was going to last for a long time.

[02:04:25] Speaker 06:
And this also, I think, is undisputed, this Treasury commitment that remains ongoing, and this is an ongoing risk to the taxpayer, and that's out there.

[02:04:35] Speaker 06:
So the question is, when Congress says we're transferring all the rights of the shareholders in this instance,

[02:04:43] Speaker 06:
to the conservator.

[02:04:44] Speaker 06:
And when it says there should be no action to restrain the conduct of this conservator, did Congress need for there to be room for claims that this was a bad deal?

[02:04:59] Speaker 06:
This isn't really the way that a conservator acts.

[02:05:03] Speaker 06:
This sounds more like somebody who's thinking about putting the possibility of liquidation.

[02:05:11] Speaker 06:
So maybe that's

[02:05:16] Speaker 06:
a conservator.

[02:05:17] Speaker 06:
And that is not something that could possibly have been intended, nor could it possibly be the case that knowing the stakes that were involved in this, that Congress would contemplate actions for rescission of agreements that were going to govern this.

[02:05:38] Speaker 06:
And one thing that we know is that Congress knew it was going to be

[02:05:46] Speaker 06:
President 15 Congress addressing all the circumstances that are presented here says it addresses the purchase agreements as amended and it notes like the third amendment as well as all the other amendments and says

[02:06:04] Speaker 06:
tells Treasury, you've got to hold on to your preferred stock.

[02:06:08] Speaker 06:
You can't sell it.

[02:06:09] Speaker 06:
And it's the sense of Congress.

[02:06:11] Speaker 06:
Congress should enact, and the President should sign legislation to determine the date of failing May and failing May.

[02:06:21] Speaker 07:
Well, how would you answer?

[02:06:23] Speaker 07:
If the plaintiffs had all of the relief they're requesting, would it entail the Treasury selling shares?

[02:06:29] Speaker 06:
No, we're not saying that... I'm just pointing to that, Your Honor, just as a reflection of what it was that, like, where Congress fits into this.

[02:06:42] Speaker 06:
Congress has overseen this and... But the Congress acts by enacting a statute.

[02:06:46] Speaker 07:
And Mr. Cain and you both seem to want to avoid discussing the terms of the statute in any detail and viewing this at 30,000 feet.

[02:06:56] Speaker 07:
looking at the purpose in 2008 and so on, but we have to grapple with the terms of the statute, part of which was drafted from the FDIA or through Faria, parts of which were tacked on for this occasion.

[02:07:10] Speaker 07:
And we're stuck with that.

[02:07:12] Speaker 06:
I couldn't agree more, Your Honor.

[02:07:14] Speaker 06:
OK, so let's delve right into it.

[02:07:16] Speaker 06:
Let's understand that the statute itself doesn't contain words that permit this to go forward.

[02:07:24] Speaker 06:
We have to imply exceptions.

[02:07:26] Speaker 06:
And then.

[02:07:29] Speaker 06:
is based on reliance of courts that implied exceptions under FIRETA.

[02:07:36] Speaker 06:
Now, whether or not Congress intended to incorporate those exceptions that were traditionally implied into this language, there's no indication that Congress did that.

[02:07:49] Speaker 06:
But as we've argued in our brief, if Congress did do that, there is no ultra viris action.

[02:07:57] Speaker 11:
Why wouldn't it be ultra-virus to say the one thing we know a conservator can't do?

[02:08:04] Speaker 11:
is adopt a plan by which the companies, the regulated entities, can never actually become a solvent.

[02:08:13] Speaker 11:
They just will never have a penny in the bank account.

[02:08:16] Speaker 11:
It always goes over to your treasury.

[02:08:20] Speaker 11:
How can that be, I think that's the argument, that can't be what a conservator does, and so that can't fall within 4617F.

[02:08:29] Speaker 06:
I think that there are a couple of answers to that.

[02:08:32] Speaker 06:
I'll forget the second answer after I give my first one.

[02:08:36] Speaker 08:
Tell us the second one.

[02:08:40] Speaker 06:
I think at this point I may have forgotten

[02:08:46] Speaker 06:
when there's a reference to what a conservator can do, that and I had to sort of say that I have to look to the nature of this statute and this statute what we have is the purpose of this is to keep the Fannie Mae and Freddie Mac

[02:09:04] Speaker 06:
performing the functions that they as government-sponsored enterprises were supposed to be doing.

[02:09:12] Speaker 06:
As Judge Lambert said, look they're not in liquidation, it's now been sort of

[02:09:21] Speaker 06:
since the third amendment was entered into.

[02:09:24] Speaker 06:
And there's not been a liquidation.

[02:09:28] Speaker 06:
The enterprises are solvent.

[02:09:30] Speaker 06:
The capital, and they can perceive this way because of the enormous underlying commitment of taxpayer money.

[02:09:42] Speaker 06:
And that's sort of one level of the answer.

[02:09:44] Speaker 06:
Another level of answer is that

[02:09:48] Speaker 06:
The situation, there are no good answers for exactly how to proceed in this.

[02:09:58] Speaker 06:
And it's been Treasury's position for a long time that ultimately legislation is needed to deal with this.

[02:10:05] Speaker 06:
And indeed, that was the sense of the Congress resolution also.

[02:10:09] Speaker 06:
But it's not like there was sort of like, well, here's the terrific way of approaching it.

[02:10:14] Speaker 06:
Because one way of doing it was like,

[02:10:23] Speaker 06:
You know, that turned out to be, for a long time, fairly sort of not sort of good.

[02:10:30] Speaker 06:
You know, for all the reasons, you know, that, you know, we've discussed in the brief, you know, and there was, you know, that very severe spiral.

[02:10:40] Speaker 06:
Since so, one answer is to go, and the parties could have decided this sort of, like, right at the beginning, could have gone, look, here's what,

[02:10:50] Speaker 06:
You know, we've put a lot of money on the line.

[02:10:53] Speaker 06:
We're going to waive our periodic commitment fee.

[02:10:56] Speaker 06:
We're also entitled to dividends.

[02:10:58] Speaker 06:
But we don't want to put you under.

[02:11:00] Speaker 06:
We don't want to make you draw on the commitment.

[02:11:03] Speaker 06:
So what we'll do is it's unclear when and if and to what extent you're ever going to be making profits.

[02:11:09] Speaker 06:
But we will take that risk.

[02:11:12] Speaker 06:
And, you know, and maybe there'll be quarters where we do lick for treasury, the taxpayer lick the well.

[02:11:18] Speaker 06:
And then there'll be others where we don't get anything at all.

[02:11:22] Speaker 06:
And they could have decided to do that right at the outset.

[02:11:26] Speaker 06:
And in fact, the way that it's played out is that, yeah, as it happened, there was a big spike in 2013 in profitability, which resulted largely from that one-time recognition of tax-deferred assets, goes down

[02:11:48] Speaker 06:
the year after that in 2015 would have been paying more under the old dividend arrangement than they were paying under the Third Amendment.

[02:12:00] Speaker 06:
And you don't know what's going to happen in this Treasury commitment

[02:12:06] Speaker 06:
And part of what the enterprises are paying for, even though we've waived the periodic commitment fee, is the enormous amount of money that has been sunk in, but the fact that there remains on the line sort of this $250 billion

[02:12:24] Speaker 06:
that the enterprises can draw on and that is absolutely crucial to their existence.

[02:12:30] Speaker 06:
And this is what these review provisions, which is what it's an issue here, are designed to protect.

[02:12:37] Speaker 06:
No, we don't get to fight about exactly what the conservator thought was the best way of dealing with this

[02:12:46] Speaker 06:
very difficult situation and to say, well, you know, a really good conservator would have done something else.

[02:12:52] Speaker 06:
I think that what they did was entirely appropriate and sensible.

[02:12:57] Speaker 06:
But whether you agree or disagree with that, that goes right to the kinds of things that were meant to be protected and don't fall into what anybody would sort of typically characterize sort of this ultra virus in the sense of their explicit statutory prohibition and you step over that line.

[02:13:17] Speaker 07:
The statute does have a limitation.

[02:13:20] Speaker 07:
I mean, the broad discretion of the FHFA here is to act as necessary and appropriate to conserve, as conservative or as receiver, and the plaintiffs came in saying that's not what happened, and you all produced an incomplete administrative record.

[02:13:43] Speaker 06:
Well, obviously we take

[02:13:48] Speaker 06:
the administrative record was incomplete.

[02:13:51] Speaker 06:
But certainly, what you can't.

[02:13:52] Speaker 07:
Well, there are now things that have been produced that were not submitted.

[02:13:56] Speaker 06:
I mean, Your Honor, we rest in imposing the motion to supplement.

[02:14:02] Speaker 06:
I think we laid out our position on why it would not be appropriate.

[02:14:06] Speaker 06:
And I mean, there are things like the statement of the CFO who says, well, maybe I would have made a comment now.

[02:14:14] Speaker 06:
That statement is from August 2012.

[02:14:17] Speaker 06:
I believe that's the same CFO who signed the securities disclosure form that Your Honor was referring to.

[02:14:24] Speaker 06:
The 10Q?

[02:14:27] Speaker 06:
Yeah, the 10Q, that sort of contained all the language that Your Honor read out loud.

[02:14:35] Speaker 06:
And regardless of what she says, she might have said to somebody then, she was signing a form that went to the regulators and

[02:14:46] Speaker 06:
This wasn't the record or the kind of thing that was supposed to be looked at, as opposed to statements that people make in discovery that are untested, that are their recollections about things that were said.

[02:15:03] Speaker 06:
That's really not the way that an administrative record should be put together.

[02:15:09] Speaker 06:
That would open up all kinds of administrative records to claims that they should be supplemented.

[02:15:16] Speaker 06:
No, I don't think so, Your Honor.

[02:15:19] Speaker 06:
I mean, it's true that Overton Park says that if you really can't figure out what's going on in the case, that the agency explanation isn't adequate, that you can remand to the agency or request additional declarations.

[02:15:33] Speaker 06:
from the agency.

[02:15:35] Speaker 06:
And we could certainly put in additional declarations, but we think that what the agency has said is clear.

[02:15:42] Speaker 06:
And this is sort of a funny kind of APA case, because remember, this is coming up in the context of a sort of amendment into a purchase agreement.

[02:15:51] Speaker 06:
This isn't sort of like the issuance of rulemaking.

[02:15:58] Speaker 06:
that exactly what one expects from an administrative record.

[02:16:02] Speaker 07:
It goes beyond even what you said.

[02:16:04] Speaker 07:
Mr. Stern says the court may require the administrative officials who participated in the decision to give testimony explaining the record.

[02:16:10] Speaker 06:
Yes, Your Honor.

[02:16:11] Speaker 06:
And there are also, as Your Honor is aware, lots of decisions talking about not having administrative officials.

[02:16:18] Speaker 07:
Well, the district court doesn't do that lightly.

[02:16:21] Speaker 06:
No.

[02:16:21] Speaker 06:
And there's certainly no basis for doing it here.

[02:16:28] Speaker 06:
didn't and couldn't, but if everybody knew in August of 2012 exactly what the pattern was going to be, that there would be, you know, for the next three years, you know, when you looked at it, you'd go, well, okay, like, that's not, like, unlawful.

[02:16:46] Speaker 06:
You know, there's no basis for saying that there should be administrative review, even if you assumed that everybody knew exactly what was going to happen.

[02:16:56] Speaker 11:
Well, they would say, imagine if, assume the worst record, administrative record possible, and that is that it turns out everybody lined up saying, woohoo, they're now solvent, and we think they're gonna stay solvent for the next three or four years.

[02:17:14] Speaker 11:
Let's have a new agreement here, and we're gonna take all of that money and leave them not a penny to get back on their feet with.

[02:17:25] Speaker 11:
Is that, could a conservator do that?

[02:17:27] Speaker 11:
I've just taken the worst administrative record possible.

[02:17:30] Speaker 11:
Would that prove their case if you weren't acting as a conservator?

[02:17:33] Speaker 06:
I think that a conservator could do that, given the position, like, the extent to which, like,

[02:17:39] Speaker 06:
ongoing Treasury commitment, you know, is crucial.

[02:17:43] Speaker 06:
They could decide that.

[02:17:44] Speaker 06:
I mean, but you need to know, I mean, maybe there's some fact working in that hypothetical that is extremely problematic, but also, I mean, it should be clear, even, like, nothing that has been induced, like, sort of would support that kind of claim.

[02:18:00] Speaker 06:
I mean, look, what Mr. Olson says, you

[02:18:08] Speaker 06:
like if everything had gone like south, like in a big way, you know, for the next few years.

[02:18:14] Speaker 06:
And the answer was no.

[02:18:16] Speaker 06:
It was, you know, it's a standalone.

[02:18:18] Speaker 06:
I mean, there's, you know, they've got two variants.

[02:18:21] Speaker 06:
One of them is, well, you know, they should have known in 2012 that things were going to be better, at least for a while.

[02:18:28] Speaker 06:
But the more fundamental one is, no, this is just a deal you can't do.

[02:18:32] Speaker 06:
It doesn't matter how good it's going to be, how much it's going to advance sort of the interests of everybody involved in a very difficult and perhaps, I always had to say unique, but perhaps unique situation.

[02:18:46] Speaker 07:
The administration took a position, I think a year earlier, I think in 2011, that the GSE should be wound down, right?

[02:18:54] Speaker 07:
There's a press release or something like that.

[02:18:58] Speaker 07:
But then comes the Third Amendment, and it's now concrete.

[02:19:01] Speaker 07:
We're going to wind down these GSEs.

[02:19:06] Speaker 07:
But we're not going to pull the receivership trigger.

[02:19:10] Speaker 07:
which would, of course, have required respecting the liquidation preferences of the plaintiffs.

[02:19:16] Speaker 06:
Well, it's not a liquidation.

[02:19:18] Speaker 06:
And the statute, I mean, first of all, the statute specifically contemplates the wind down as being a power that can be asserted in the conservatorship.

[02:19:28] Speaker 06:
But it's liquid.

[02:19:29] Speaker 06:
Where's that?

[02:19:30] Speaker 06:
It's in...

[02:19:36] Speaker 06:
It's 461782, which allows the conservator as well as the receiver to take actions for the purposes of reorganizing, rehabilitating, or winding up the affairs of the GSEs.

[02:19:53] Speaker 07:
The word respectively is implicit in that.

[02:19:59] Speaker 06:
I disagree, Your Honor, because there are a lot of powers that are set out specifically for the conservator and the receiver in the statute.

[02:20:08] Speaker 06:
This one doesn't make that.

[02:20:09] Speaker 06:
But I think more fundamentally, I believe that the Third Amendment talks about an acceleration of the enterprises reducing or retaining mortgage portfolios.

[02:20:23] Speaker 06:
In that sense, that's a kind of winding up.

[02:20:29] Speaker 06:
What you have in terms of their ongoing functionality is not in any particular way, it's a winding up.

[02:20:39] Speaker 06:
What Treasury does think is

[02:20:47] Speaker 06:
sort of like a re-capitalization and conservatorship, and said this many times that legislation is appropriate, but... But when the Third Amendment was announced, the Treasury said, we're going to wind this thing down, we're going to kill it, we're going to drive a stake through its heart, and we're going to salt the earth so it can never grow back.

[02:21:09] Speaker 07:
I don't remember that language.

[02:21:12] Speaker 07:
I may be confused on how to contain the lingoist.

[02:21:16] Speaker 07:
But that was the gist of it.

[02:21:17] Speaker 07:
We're not going to allow it to be recapitalized in any way, and we're going to look to a future in which the GSEs don't play a role.

[02:21:24] Speaker 06:
Well, I think what Treasury has said repeatedly is that it thinks that Congressional action is appropriate, and we've discussed the difficulties of recapital.

[02:21:37] Speaker 07:
Congressional action has to live within the statute it's got.

[02:21:41] Speaker 06:
Yes, and it is.

[02:21:42] Speaker 06:
I mean, because the alternatives are not good ones.

[02:21:46] Speaker 06:
I mean, it's not like what they had wasn't a good alternative.

[02:21:50] Speaker 06:
I mean, that wasn't doing well.

[02:21:52] Speaker 06:
What's happened now, it's like they're all sort of things to deal with a very difficult situation.

[02:21:59] Speaker 07:
I think they had two alternatives, to act as a conservator, which they didn't want to do, or to act as a receiver and move towards liquidation.

[02:22:09] Speaker 06:
No, Your Honor, I don't think that this is a move towards liquidation.

[02:22:12] Speaker 06:
There has not been a liquidation.

[02:22:15] Speaker 07:
Well, they could go slowly considering the size of the portfolio.

[02:22:19] Speaker 06:
And they could legitimately do that.

[02:22:21] Speaker 06:
If that's what they wanted to do, they could do that.

[02:22:25] Speaker 06:
There's nothing wrong with a conservator doing that.

[02:22:26] Speaker 11:
So if you're moving, if you're in the moving stage, you're not yet liquidating.

[02:22:31] Speaker 11:
Is that something conservators do, or can only a receiver do the moving to liquidation?

[02:22:35] Speaker 06:
You can move toward a liquid.

[02:22:37] Speaker 06:
I mean, a conservator can probably go

[02:22:39] Speaker 06:
So, you know, we're going to, like, sort of, this isn't working.

[02:22:43] Speaker 06:
We're going, like, we need to set the stage for liquidation.

[02:22:47] Speaker 06:
I don't say that that is what's happening here at all.

[02:22:49] Speaker 06:
I have no reason to believe that that's the case.

[02:22:51] Speaker 06:
I'm just saying that a conservator could do that, and the statute specifically refers to rehabilitating, reorganizing, winding, and winding up.

[02:23:02] Speaker 06:
Those are all things that you, even if it

[02:23:04] Speaker 06:
didn't say that.

[02:23:05] Speaker 11:
How would we know when winding up stops and liquidation begins?

[02:23:08] Speaker 06:
Because you see a liquidation.

[02:23:10] Speaker 06:
Right now, these enterprises are functioning, they're performing their statutory purpose.

[02:23:19] Speaker 06:
That's what that legislation was all about.

[02:23:23] Speaker 06:
And the stockholders are not the people

[02:23:27] Speaker 06:
who Congress wanted to sort of be able to come in and sue.

[02:23:33] Speaker 06:
And that's all that this case is about, is do they get to come in and say, I'm not happy with the way that you guys are dealing with this.

[02:23:43] Speaker 07:
Let's say they said that directly.

[02:23:45] Speaker 07:
The stockholders may not sue.

[02:23:47] Speaker 07:
The shareholders may not sue.

[02:23:49] Speaker 07:
That truly means in the capacity of shareholders, right?

[02:23:53] Speaker 07:
Creditors can sue, right?

[02:23:55] Speaker 07:
Tradesmen can sue.

[02:23:56] Speaker 06:
Oh, yeah.

[02:23:57] Speaker 07:
OK.

[02:23:58] Speaker 07:
So they've come in, in part, asserting what they say are direct claims, not derivative claims, right?

[02:24:02] Speaker 07:
Not in their capacity.

[02:24:04] Speaker 07:
In other words, the succession clause succeeds to their rights as shareholders, which would be their derivative rights.

[02:24:14] Speaker 06:
Well, I mean, again, I mean,

[02:24:17] Speaker 06:
The language is very broad, all rights, titles, powers, privileges of the regulated entity, of any stockholder, director with respect to the entity and the assets of the regulated entity.

[02:24:29] Speaker 06:
I mean, that's really broad, but as we discussed in our brief,

[02:24:33] Speaker 06:
These are quintessential derivative claims.

[02:24:37] Speaker 06:
What they're saying is that the conservator isn't mining the store and looking after the enterprises.

[02:24:45] Speaker 07:
It's a quintessential derivative claim that a relief accrues to the corporation and not to them, right?

[02:24:51] Speaker 06:
Yes.

[02:24:51] Speaker 07:
And they want their liquidation preferences.

[02:24:52] Speaker 07:
That's not an asset of the corporation.

[02:24:55] Speaker 06:
Well, I mean, that's what they say.

[02:24:56] Speaker 06:
But what they want, I mean, everybody wants money for themselves sooner or later.

[02:25:01] Speaker 06:
I mean, you know, that's always the feature.

[02:25:04] Speaker 09:
No, but the question is whether they want it directly or directly.

[02:25:07] Speaker 06:
No, and they want it.

[02:25:08] Speaker 06:
But what they want is they're saying that the value of their shares, I mean, they don't want this.

[02:25:15] Speaker 06:
They don't want liquidation preferences.

[02:25:19] Speaker 06:
They want the value of their shares to go up.

[02:25:21] Speaker 06:
You know, it's sort of like, you know, at this point, we're talking largely about speculators.

[02:25:25] Speaker 06:
And the idea of speculation is quite illegitimate.

[02:25:28] Speaker 06:
You buy low, you try to sell high.

[02:25:30] Speaker 06:
They're going, my shares will be higher.

[02:25:32] Speaker 06:
You know, fair enough, but Congress has also said you don't get to bring these lawsuits.

[02:25:39] Speaker 07:
Well, they had a pre-existing right to bring the lawsuit.

[02:25:42] Speaker 07:
The succession clause takes away something.

[02:25:45] Speaker 07:
Yes, it takes away... But does it take away a direct claim?

[02:25:47] Speaker 07:
It doesn't take away a... Just because a shareholder is a shareholder doesn't mean that his loss of rights as a shareholder means his loss of rights in any other capacity.

[02:25:58] Speaker 07:
If he were also a tradesman, he'd still retain his trade account.

[02:26:02] Speaker 06:
Yeah, no, that's right.

[02:26:03] Speaker 06:
I mean, we're not, but what we've got here is sort of something that's going sort of fundamentally to how the enterprises should be compensated or how, or how they should be compensating treasury.

[02:26:17] Speaker 06:
I mean, and they claim

[02:26:22] Speaker 06:
what they say is the harm to the enterprises.

[02:26:26] Speaker 07:
Well, that's a question of Delaware and Virginia law.

[02:26:28] Speaker 11:
Well, I think it's, I mean, we've argued, and I think correctly in our brief, that it's a matter of federal law, but federal law, like, sort of, I don't think that there's... The complaint doesn't even ask on their shareholder claims, does not ask for damages to them, it asks for compensatory damages and disgorgement in favor of Fannie Mae.

[02:26:48] Speaker 11:
So that sure sounds like they're not getting a recovery.

[02:26:52] Speaker 06:
I think it's a derivative claim, Your Honor.

[02:26:57] Speaker 07:
Insofar as they want their liquidation preference, they don't get Fannie Mae doesn't get anything.

[02:27:02] Speaker 06:
Yes, but their leave, but again, that's like anything else that is sort of, you know, the derivative of like sort of like harm.

[02:27:13] Speaker 06:
And it's also like

[02:27:15] Speaker 06:
so far away from being like a red planet where they don't want.

[02:27:20] Speaker 06:
I mean, the purpose of the relief that's being sought here isn't to put a directive to put this into liquidation so that they can realize their liquidation preferences.

[02:27:30] Speaker 06:
Nobody wants that.

[02:27:32] Speaker 06:
I mean, that really isn't what this lawsuit is about.

[02:27:36] Speaker 07:
Well, what they do want is some sort of preservation of those liquidation preferences for when and if there's a liquidation, which will have, as you said, an immediate effect on the price of their shares.

[02:28:02] Speaker 06:
What have they got?

[02:28:06] Speaker 06:
Here's what.

[02:28:06] Speaker 06:
What they have is a lot more than anybody would have had, if not for these deals.

[02:28:13] Speaker 06:
I mean, I realize I'm sort of beating the drum here, but this is, in some respects, the shareholders are beneficiaries, and almost the incidental beneficiaries of a huge taxpayer risk.

[02:28:31] Speaker 06:
And what Congress was trying to do was to make sure that the conservator and Treasury could take the steps that needed to be taken when everybody knew it was going to be a difficult time with a ongoing, huge Treasury risk at issue.

[02:28:52] Speaker 06:
And we think that these things are really clear.

[02:28:55] Speaker 06:
And I thank you so much for your time.

[02:28:58] Speaker 03:
Thank you.

[02:28:59] Speaker 03:
Um, I know that no one had any time left because we used up all of your time.

[02:29:06] Speaker 03:
Uh, but we'll we'll give you that three, three minutes from rebuttal.

[02:29:13] Speaker 05:
Thank you, Your Honor.

[02:29:14] Speaker 05:
Um, in the first place, this is who did it.

[02:29:20] Speaker 05:
What did they do and why did they do it?

[02:29:24] Speaker 05:
We know that it was Treasury and FHFA working together.

[02:29:27] Speaker 05:
The record is replete with that.

[02:29:29] Speaker 05:
The statute precludes Treasury from supervising or directing what the FHFA does with respect to its position as a conservator.

[02:29:39] Speaker 05:
Now, that is one violation of the statute.

[02:29:41] Speaker 05:
And there's a reason for that, because the FHFA is supposed to act as a fiduciary in its capacity as a conservator.

[02:29:49] Speaker 05:
The Treasury would have separate interests, and it has interests, and that's all over the record, too, of the taxpayer.

[02:29:56] Speaker 05:
And so that's what happened here.

[02:29:58] Speaker 05:
We saw the Treasury directing something that happened that they decided that was in the best interest of the taxpayer, and there's plenty in the record that we have, probably more in the record that we don't have, that this was done to strip the stockholders of any

[02:30:15] Speaker 05:
residual value.

[02:30:16] Speaker 05:
Now, when FHFA announced this in the first place on September 7, 2008, they answered this questionnaire.

[02:30:24] Speaker 05:
I referred to it before, 2443 in the Joint Appendix.

[02:30:28] Speaker 05:
The stockholders will continue to retain all rights in the stock's financial worth.

[02:30:33] Speaker 05:
Now, we find out that they didn't really intend that, or the government didn't really intend that, but what they also said on the same page, can the conservative determine to liquidate the company?

[02:30:44] Speaker 05:
answer.

[02:30:45] Speaker 05:
The conservator cannot make a determination to liquidate the company.

[02:30:49] Speaker 05:
Now, that is the FHFA determining or articulating what powers it has as a conservator under the statute that it administers.

[02:30:59] Speaker 05:
Now, what we have is a shell game going on here.

[02:31:01] Speaker 05:
First of all, the government decides that there's going to be a conservator and it has specific responsibilities and duties

[02:31:10] Speaker 05:
as a fiduciary acting as a conservator.

[02:31:13] Speaker 05:
It also then says, well, we can act as a receiver at the same time.

[02:31:17] Speaker 05:
Those those responsibilities and those statutory duties are separate.

[02:31:22] Speaker 05:
And if you have, if you're acting as a conservator, that is different than acting as a receiver.

[02:31:27] Speaker 05:
What we know now

[02:31:29] Speaker 05:
And I will summarize that what the government did, acting together, is decide that this was in its best interest of the taxpayer, something that Congress might have decided to do.

[02:31:42] Speaker 05:
By the way, the Appropriations Act, the record is quite clear, and we quote,

[02:31:46] Speaker 05:
the the the supervising sponsor of that appropriate that massive appropriations bill didn't validate or ratify what's going on here and the sponsor specifically said so.

[02:31:57] Speaker 05:
But but what has happened here is that the government decided that it would it would bring these entities to a close and it said that repeatedly to liquidate them

[02:32:07] Speaker 05:
and to make sure that they have no further value to the stockholders.

[02:32:12] Speaker 05:
The FHFA said in the Samuels case that we quoted our briefs that they are net worth insolvent now.

[02:32:20] Speaker 05:
Since this all took place, there hasn't been a single dollar going into these entities from the Treasury.

[02:32:28] Speaker 05:
The record is

[02:32:29] Speaker 05:
is difficult for us to deal with, because the Treasury Department talks about, well, there may be some things in the record, but you really wouldn't be concerned about those things.

[02:32:38] Speaker 05:
The FHFA didn't even try to produce an administrative record.

[02:32:42] Speaker 05:
They gave us a summary.

[02:32:43] Speaker 11:
You said your position would be the same, whatever the record showed.

[02:32:46] Speaker 05:
on motivation, correct?

[02:32:48] Speaker 05:
Well, we are entitled to an administrative record, and to the extent that we are entitled to that, it should be remanded to the district judge to insist on our record, because we're entitled to know what happened and why it happened.

[02:33:01] Speaker 11:
But your position wouldn't change, right?

[02:33:03] Speaker 05:
We're also saying, Judge Millett, because on the record, that what we do have is we have the FH, FA, taking a position that it will be a conservator.

[02:33:13] Speaker 05:
We know they have said it.

[02:33:15] Speaker 05:
In their it is set in their statute.

[02:33:17] Speaker 05:
It's set in their regulations It's set in other things what they must do which is to return the entity to a sound and solvent condition We know that they haven't done that we know that they've done the reverse of that they've made it impossible You can't have a conservator take all of the assets out of an entity and the commitment the Treasury commitment isn't an asset They've said that themselves not under any standards.

[02:33:40] Speaker 05:
Is that an asset?

[02:33:42] Speaker 03:
It's a problem.

[02:33:43] Speaker 03:
Mr. King says

[02:33:45] Speaker 03:
that he will stipulate that maybe the third amendment was a bad deal.

[02:33:50] Speaker 03:
And so he says that's just a bad business judgment.

[02:33:54] Speaker 03:
So what's your response to that?

[02:33:56] Speaker 05:
The response is that it might be a bad business judgment, and perhaps it was, but it was not the act of a conservator.

[02:34:03] Speaker 05:
And the power that the government had is to make judgments with respect to the benefit of the conservator.

[02:34:10] Speaker 05:
With respect to Section F, which we've talked about here, we refer to the Leon case, which specifically talks about the fact that the FHFA, which is an 11th Circuit decision in 2012, cannot evade judicial scrutiny by merely labeling its actions with a conservator stamp.

[02:34:30] Speaker 05:
And this is on page 1278 of the federal reports.

[02:34:35] Speaker 05:
Moreover, if the FHFA were to act beyond the statutory or constitutional bounds in a manner that adversely impacted the rights of others, Section 4617F would not bar judicial oversight or review of the actions.

[02:34:48] Speaker 05:
Because the position that they're taking now is that we can do anything we want and we're immune from judicial scrutiny.

[02:34:55] Speaker 05:
That cannot be, and that is not what the statute says.

[02:34:58] Speaker 05:
Nor are the other provisions

[02:35:00] Speaker 07:
I think we have that point.

[02:35:03] Speaker 07:
Do you have a succinct and devastating, and I emphasize succinct, comment on 4623?

[02:35:11] Speaker 05:
Yes, we believe it applies to those sections that are referred to their 40s at 14, 15, 16, 17.

[02:35:18] Speaker 05:
And the actions of, we hadn't briefed it before.

[02:35:24] Speaker 07:
You'll submit on that.

[02:35:25] Speaker 05:
Well, we will be happy to submit, but we do not apply.

[02:35:27] Speaker 05:
We do not believe it remotely applies to the situation, and it is incomprehensible.

[02:35:33] Speaker 05:
that this agency never thought to raise what they now say at the suggestion of the court that, oh, this lawsuit should never have taken place whatsoever.

[02:35:44] Speaker 05:
Homer nodded.

[02:35:45] Speaker 05:
They came to a late.

[02:35:47] Speaker 05:
At any rate, we think that the record needs to be developed.

[02:35:53] Speaker 05:
We have an absolute right under Overson Park to look into what the government was doing, why it was doing it, the circumstances of its doing it, but that this is clear.

[02:36:04] Speaker 05:
that if you're going to act as a conservator and the powers of the government can't be in the best interest of the agency, which will obliterate all the other provisions in the statute, the agency, when acting as a conservator,

[02:36:19] Speaker 05:
may act in the interest of the agency fulfilling those responsibilities, but it doesn't rub out all the other statutory provisions.

[02:36:26] Speaker 05:
And you look at their regulations in 76 CFR, which we've cited, the primary purpose is to preserve the entity and return it to a sound and solid condition.

[02:36:38] Speaker 02:
Thank you.

[02:36:44] Speaker 04:
Thank you, Your Honors.

[02:36:44] Speaker 04:
I'll be very brief.

[02:36:45] Speaker 04:
Mr. Cain for the FHFA said that the shareholders have more rights in receivership than conservatorship.

[02:36:52] Speaker 04:
That is not only logically impossible, but irreconcilable with the statute.

[02:36:56] Speaker 04:
4617B2K, Roman at 1, says that it is the act of putting the entities into receivership

[02:37:05] Speaker 04:
only receivership that shall terminate the rights and claims of the shareholders arising out of their status as shareholders.

[02:37:12] Speaker 04:
That's the action subject to their payment claims under C1D and other provisions recognized there that it constrains.

[02:37:21] Speaker 04:
It's a limitation when it goes into receivership for shareholders.

[02:37:25] Speaker 04:
Before that, they obviously have more rights.

[02:37:27] Speaker 04:
And it was acknowledged, Mr. Olson, JA 2443, I urge the court to look at it.

[02:37:32] Speaker 04:
Mr. Lockhart, the director of FHFA,

[02:37:34] Speaker 04:
And their formal written answers say, shareholders continue to retain all rights in the stock's financial worth.

[02:37:43] Speaker 04:
They retain rights in conservatorship to the economic rights of their shares.

[02:37:47] Speaker 04:
They can still trade them.

[02:37:49] Speaker 04:
No one said anything that they can't trade.

[02:37:51] Speaker 04:
They can receive dividends, if you're the Treasury anyway.

[02:37:53] Speaker 04:
A shareholder has rights in conservatorship.

[02:37:55] Speaker 11:
Did those rights change under the PSPAs, or the First and Second Amendment?

[02:37:58] Speaker 04:
No.

[02:37:59] Speaker 11:
They didn't change at all?

[02:38:01] Speaker 04:
No, not that I'm aware of.

[02:38:03] Speaker 04:
I don't think they changed.

[02:38:04] Speaker 04:
They were nullified in the Third Amendment.

[02:38:06] Speaker 04:
And Your Honor, to your question about the original deal on the prohibition on dividends without Treasury's consent, 5.1, it clearly says without Treasury's consent.

[02:38:18] Speaker 04:
It's not an absolute prohibition that would allow Treasury to consent.

[02:38:21] Speaker 11:
The reason we're not challenging that.

[02:38:23] Speaker 11:
So that's the right you had coming into the Third Amendment, is no dividend without Treasury's consent.

[02:38:29] Speaker 11:
And you don't challenge that?

[02:38:30] Speaker 11:
That's why I'm just asking you about it changing.

[02:38:32] Speaker 04:
Yes.

[02:38:32] Speaker 04:
The reason we're not challenging the provision in the original PSPA that says no dividends without Treasury's consent is that is not the thing that has caused us not to receive dividends.

[02:38:44] Speaker 11:
No, I understand.

[02:38:45] Speaker 11:
So the stockholder interests by the time of the Third Amendment were

[02:38:50] Speaker 11:
that we have a right to a dividend after Treasury's paid with Treasury's consent?

[02:38:55] Speaker 04:
No, it doesn't say after Treasury's been paid.

[02:38:57] Speaker 04:
It just says with Treasury's consent.

[02:38:59] Speaker 04:
It's no different than any shareholder's right to a dividend.

[02:39:02] Speaker 04:
It's contingent on the people who control the company declaring a dividend.

[02:39:06] Speaker 04:
That's all it says.

[02:39:07] Speaker 04:
They have to declare it.

[02:39:08] Speaker 04:
And that's not what happened.

[02:39:09] Speaker 04:
The reason we're not challenging that is that's not the reason we didn't get a dividend.

[02:39:14] Speaker 04:
Since I'm running out of time, they say we don't say anything about the periodic commitment fee.

[02:39:19] Speaker 04:
The reason we don't is they waived it.

[02:39:21] Speaker 04:
It had no value.

[02:39:22] Speaker 04:
It was at best going to be based on a market value.

[02:39:25] Speaker 04:
So at best, it creates a fact issue of what that would be.

[02:39:28] Speaker 04:
And I want to be careful.

[02:39:29] Speaker 04:
Wait, how can you say it had no value?

[02:39:31] Speaker 04:
Well, they waived it every year.

[02:39:33] Speaker 11:
No, they waived it.

[02:39:33] Speaker 11:
But that doesn't mean it doesn't have value.

[02:39:35] Speaker 04:
Fair enough.

[02:39:35] Speaker 04:
Then it may have had some potential value.

[02:39:38] Speaker 04:
And I want to be careful here because there's protected information that's with the court.

[02:39:43] Speaker 04:
that would address the issue.

[02:39:46] Speaker 04:
I would simply request that the court look at exhibit 34 to the institutional plaintiff's motion for judicial notice.

[02:39:52] Speaker 04:
It's a fact issue of what the value would have been.

[02:39:54] Speaker 04:
And to our position, it would have peeled in comparison to the net worth sweep in the $100 billion and tens of billions of dollars they've swept over.

[02:40:02] Speaker 04:
This debate, Your Honors, just if I could, on the direct claims, when they say we have no rights, and then they said we have no direct claims, they've never said that before.

[02:40:10] Speaker 04:
They, neither they nor the FDIC, no court, as Judge Easterbrook said, no court has ever held, the FIREA succession provision or the HERA succession provision does that, and numerous courts have allowed it.

[02:40:23] Speaker 11:
Well, they haven't said it because you didn't raise it and your complaint doesn't seek any relief on it.

[02:40:26] Speaker 04:
No, no, no, no, no, sorry Judge Miller.

[02:40:28] Speaker 04:
We absolutely raise direct claims.

[02:40:29] Speaker 04:
Our breach of contract claims were unambiguously always beautifully direct.

[02:40:33] Speaker 11:
I was distinguishing because you had shareholder claims that were derivative and direct, and then as I took your briefing, you also had contract claims.

[02:40:40] Speaker 11:
So what you're calling direct claims are the same as your contract claims?

[02:40:43] Speaker 04:
Our contract claims are direct claims.

[02:40:46] Speaker 11:
Yes.

[02:40:47] Speaker 04:
They have always been direct claims.

[02:40:48] Speaker 04:
Do you have any direct claims?

[02:40:49] Speaker 04:
We litigated them as direct claims.

[02:40:50] Speaker 04:
They were analyzed as direct claims.

[02:40:52] Speaker 07:
Because the contract in question is the certificate.

[02:40:55] Speaker 04:
Yes.

[02:40:55] Speaker 04:
It's a contract between me, the shareholder, and you, the company.

[02:40:59] Speaker 04:
I'm the shareholder, I get to enforce the contract.

[02:41:02] Speaker 04:
It is a direct claim.

[02:41:03] Speaker 04:
Look at page six of our reply brief.

[02:41:05] Speaker 04:
Those kinds of claims are always analyzed under state laws, direct claims.

[02:41:08] Speaker 04:
They didn't even argue this in the district court or in any other case, in Kelmer, in the Barnes case.

[02:41:14] Speaker 11:
I just wanna make sure, I'm crystal clear in understanding this.

[02:41:17] Speaker 11:
Is your direct claim, is that just another way of talking about your contract claims or do you use a direct claim label to mean something in addition to your contract claims?

[02:41:28] Speaker 04:
No.

[02:41:29] Speaker 11:
I'm sorry?

[02:41:30] Speaker 04:
Let me try to be very clear.

[02:41:32] Speaker 04:
Our breach of contract claims are direct claims.

[02:41:35] Speaker 04:
I don't mean to suggest there's some other amorphous direct claim.

[02:41:38] Speaker 04:
Our breach of contract claims are all direct.

[02:41:41] Speaker 04:
Breach of contract, breach of implied covenant.

[02:41:44] Speaker 04:
The only issue was whether we said enough for a direct fiduciary breach claim.

[02:41:49] Speaker 04:
And on that, I'll rest on what I said before, which is we think we said enough.

[02:41:53] Speaker 04:
If not, we ask the right to amend.

[02:41:55] Speaker 04:
But on breach of contract, there's no ambiguity at all.

[02:41:58] Speaker 04:
Those claims were brought only as direct claims.

[02:42:01] Speaker 04:
And we asked for damages in paragraph 7 of our prayer for relief below what Your Honor just read, Judge Miller.

[02:42:06] Speaker 04:
We asked for payment directly to the shareholders, directly.

[02:42:10] Speaker 04:
Nothing goes through the companies.

[02:42:14] Speaker 04:
Just to, in the Barnes case, the Levin case, the Kelmer case, the FHFA or the FDIC, whichever it was, didn't even try to intervene on behalf of the direct claims.

[02:42:24] Speaker 04:
They admitted through their conduct that direct claims belonged to the shareholders.

[02:42:28] Speaker 04:
They never even took the position in any of those cases.

[02:42:32] Speaker 04:
Please see the cases and footnote six on page four of our reply and also what happened in Kelmer.

[02:42:37] Speaker 04:
And it does, to what we discussed earlier, it does raise a serious issue of constitutional doubt to even suggest that shareholders, whom they admit have economic rights and interests, don't have the ability to come to court to protect them.

[02:42:51] Speaker 04:
That raises serious constitutional issues, as recognized by Judge Easterbrook in the Levin case, in the plaintiffs in all Winstar case, and by Judge Edwards in the Waterview case, which is cited in the Pershing Square amicus brief, which I

[02:43:05] Speaker 04:
strongly commend the court to look at.

[02:43:07] Speaker 11:
Did you raise this constitutional doubt argument in your opening brief?

[02:43:11] Speaker 04:
Did we?

[02:43:12] Speaker 11:
In your opening brief, I didn't see it there.

[02:43:14] Speaker 04:
I don't know whether we did, but the conversion square amicus brief raises it, and it's most applicable to the direct claims.

[02:43:20] Speaker 04:
Finally, Your Honors, this whole debate about receivership, conservatorship, what on earth should we as a country do with these two entities?

[02:43:27] Speaker 04:
is fascinating, but it's irrelevant to the simple fact that the private shareholders had contractual rights that were breached.

[02:43:36] Speaker 04:
And our friends at the FHFA said, well, you didn't do anything to save.

[02:43:40] Speaker 04:
You didn't invest to help rescue this entity.

[02:43:42] Speaker 04:
I want the court to know that of the $35 billion of preferred, $22 billion of it was invested in 2007 and 08, when it was clear that these entities were distressed.

[02:43:54] Speaker 04:
And that can be found in the record at FHFA 631 and 2062, the document in the district court 24-10 at 302 and 560.

[02:44:05] Speaker 04:
22 billion in those last two years.

[02:44:09] Speaker 04:
Who's going to want to, and they invested on the strength of those certificates that said they got paid before any common.

[02:44:17] Speaker 04:
And that's what they've done is they've taken their common and just converted it up into their senior preferred in the Third Amendment.

[02:44:23] Speaker 04:
Who's going to want to invest in financially distressed entities that might go into conservatorship if you recognize the risk of conservatorship?

[02:44:31] Speaker 04:
You know they have broad powers.

[02:44:32] Speaker 04:
But can they rescue?

[02:44:34] Speaker 04:
Make one deal.

[02:44:34] Speaker 04:
Four years later, when the company's doing better, just change the deal so they get all the money.

[02:44:39] Speaker 04:
No one will invest.

[02:44:40] Speaker 04:
It'll be terrible for taxpayers and investors.

[02:44:43] Speaker 03:
Thank you.

[02:44:44] Speaker 03:
Thank you, Mr. Hume.

[02:44:45] Speaker 03:
The case will be submitted.

[02:44:47] Speaker 03:
Do we want supplemental briefing on 4623?

[02:44:50] Speaker 03:
All right.

[02:44:52] Speaker 03:
We would like supplemental briefing on 4623, five pages.

[02:45:00] Speaker 07:
Okay.

[02:45:02] Speaker 03:
10 pages, seven days.

[02:45:05] Speaker 03:
Thank you.