Legislative Experts Question Legality of Treasury's GSE Moves

WASHINGTON — The Treasury Department has exceeded its authority by keeping Fannie Mae and Freddie Mac in conservatorship so long and taking all their profits, two legislative experts said Thursday.

Michael Krimminger, a former general counsel for the Federal Deposit Insurance Corp., and Mark Calabria, a former top aide to Senate Banking Committee Chairman Richard Shelby, said the Treasury's actions violate a 2008 law that they helped to draft.

The Housing and Economic Recovery Act gave the Federal Housing Finance Agency the power to place the government-sponsored enterprises into conservatorship. It did so just two months after the bill was signed into law in July 2008.

"We very consciously decided in HERA that FHFA would have the sole discretion to appoint a conservator or receiver and it would have the sole discretion to say when that would end," Calabria said at an event sponsored by Investors Unite, which is suing the Treasury Department over its treatment of the GSEs.

Yet Calabria said the FHFA appears to be deferring questions about ending the conservatorships to the Treasury Department and Congress. He pointed to FHFA Director Mel Watt's comments at a hearing on Tuesday in which he implied the agency could not take action on its own.

"The taxpayers are backing Fannie and Freddie. And they will be until GSE reform is done," Watt said. "That's why it's so important for Congress to act."

Treasury decided in August 2012 that it would sweep all profits from the GSEs back to the government, but former investors of the enterprises have claimed the move was illegal. During the hearing, Watt repeatedly emphasized teh Treasury's decision, noting it was an agreement made before his tenure.

"I find it very puzzling when I hear asserted that well my hands are tied and Treasury has to make this decision. That is contrary to the intent of the law," Calabria said.

Calabria, now the director of financial regulation studies at the Cato Institute, noted the hedge fund Fairholme Funds and other investors are suing the Treasury over its profit sweep. The case is currently on hold before the U.S. Court of Federal Claims. Other Fairholme cases challenging Treasury's role in the conservatorships are currently on appeal in other courts.

Krimminger said they may have a chance of success.

"The breach with the whole framework of the [HERA] statute makes these appeals very, very strong," said Krimminger, who is now a partner at Cleary Gottlieb Steen & Hamilton LLP in Washington.

Krimminger and Calabria released a white paper at the Investors Unite event entitled: The Conservatorships of Fannie Mae and Freddie Mac: Actions Violate HERA and Established Insolvency Principles."

A FHFA spokesperson responded that "Director Watt has consistently expressed the view that conservatorship should not be a permanent end state and that it is the role of Congress to determine what the future of the housing finance system should be."

Treasury officials have also said Congress should decide the future role of Fannie and Freddie before the FHFA terminates the conservatorships.

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