Collins v. Yellen
06/23/21
The Supreme Court ruled today in Collins v. Yellen, a case brought by Fannie Mae and Freddie Mac preferred shareholders that challenged both the constitutionality of the FHFA Director's appointment and the 2012 amendment to Treasury's stock purchase agreement with Fannie and Freddie that provided for all of Fannie and Freddie's profits to be swept into Treasury. The preferred shareholders are miffed because they believe that those dividends should be paid to them first, never minding the fact that but for the Treasury stock purchase, Fannie and Freddie would have been liquidated in receivership, resulting in the preferreds being wiped out.
SCOTUS, following its ruling in Seila Law v. CFPB, held that the FHFA Director must be removable at will by the President. In light of this finding of unconstitutionality in the appointment of the FHFA Director, the Court remanded for consideration of damages from past profit sweeps. Future profit sweeps are permitted, however, as the Director is now clearly removable at will by the President.
While some media is pitching the outcome as a mixed ruling, it really isn't for the preferred shareholders. The preferreds took it on the nose here, and the market gets it: Fannie Mae preferred shares tumbled in value by 62% after the decision.
Yes, they prevailed in showing that the FHFA Director's appointment is unconstitutional, but what they were after was money, and they aren't likely to get it. The preferred shareholders were denied prospective relief. They are getting a remand regarding their claim for retrospective relief (i.e., the dividends paid out by Fannie and Freddie to Treasury), but to prevail, they will have to prove that but for the unconstitutional removal provision:
the President might have replaced one of the confirmed Directors who supervised the implementation of the third amendment, or a confirmed Director might have altered his behavior in a way that would have benefited the shareholders.
In other words, the preferreds will have to show that if Mel Watt (or someone other than Ed DeMarco) had been in place as Director in 2012, that there wouldn't have been a profit sweep into Treasury. It's hard to believe that they can show that, not because Mel Watt made no attempt (that I am aware of) to reverse the profit sweep when he came into office a year later. Proving a counterfactual on loss causation is always difficult, and I just don't see how the preferreds manage to prevail here. Apparently the market doesn't either, given the collapse of the preferred share price.
Stepping back, there's an irony about the way that both Seila Law and Collins turned out. Both cases were conservative cause litigation (although Collins was primarily motivated by money, and preferred shares tumbled in value by over 50% after the decision). Yet their immediate political impact has actually been to benefit Democrats, by enabling President Biden to take control of the CFPB and FHFA. Long term, the results might of course be different, but at least at this point, the litigation seems very short-sighted.