From Perry’s Appeals Court Transcript and Audio Recording. Thanks to unbelievable.


Mr. Hume clearly stated “I only need one way to win” and “They need to have it both ways for me not to win.”

MR. HUME: — two Government agencies colluding, but they can’t have it both ways, okay, they can’t say we’re not the Government, you can’t sure us for takings –

JUDGE MILLETT: Nor can you.

MR. HUME: — but over here in District Court —

JUDGE MILLETT: Right, but you can’t have it both ways, either, so if we’re going to assume —

MR. HUME: I’m pretty sure if I get it one way I’ll win.

JUDGE MILLETT: Well, that’s what I’m asking you is if you, on an applied —

MR. HUME: I only need one way to win.


MR. HUME: They need to have it both ways for me not to win.


Judge Brown asked the right question “whether the power that they exercised was the power authorized by the statute, or whether they acted ultra vires” and Cayne responded with “Right”.  No one really knows the value of the commitment fee.

JUDGE MILLETT: How much were the ones that you waived?

MR. CAYNE: I’m sorry?

JUDGE MILLETT: How much were the commitment fees that were waived?

MR. CAYNE: No, all I — the commitment fee has never been determined. All I’m saying is had the Third Amendment not been executed, 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 –

JUDGE MILLETT: No, I understand that, but does anyone have any sense of how much that would have been worth?

MR. CAYNE: 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. 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 Counsel this morning had to do with well, what does this term mean, and was this a good deal or a bad deal? Well, I’ll stipulate for this purpose let’s just stipulate that it was a bad deal, and in retrospect something else should have been agreed to. But this is not an APA case under any arbitrary and capricious, or other standard, the only 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 contract, when it executed the original agreement in 2008, and that has never been challenged. And what are we dealing with her? We’re dealing with an amendment —

JUDGE BROWN: Well, what if that’s not actually the question here, what if the question is not whether the conservator exercised the power, but whether the power that they exercised was the power authorized by the statute, or whether they acted ultra vires –

MR. CAYNE: Right.


Judge Millett was seeking answers of why wouldn’t it be ultra vires while Mr. Stern stumbled with his answers.

JUDGE MILLETT: Well, why wouldn’t it be ultra vires to say the one thing we know a conservator can’t do is adopt a plan by which the companies, the regulated entities can never actually become solvent, they just will never have a penny in the bank account, it always goes over to your Treasury, how can that be, I think that’s their argument, that can’t be what a conservator does, and so that can’t fall within 4617(f).

MR. STERN: I mean, I think that there are a couple of answers to that. I’ll forget the second answer after I give my first one.

JUDGE GINSBURG: Well, then tell us the second one first.

MR. STERN: I think at this point I may have forgotten both of them, Your Honor. The, I mean, first the, when there’s a reference to what a conservator can do, that, and I hate to sort of say we have to look to the nature of this statute, and this statute what we have is, the purpose of this is to keep Fannie Mae and Freddie Mac performing the functions that they as government sponsored enterprises were supposed to be doing. And as Judge Lamberth said, look, they’re not in liquidation, it’s now been sort of, like, you know, three and a half, almost four years since the Third Amendment was entered into, and there’s not been a liquidation, the enterprises are solvent, the capital, there, like, is the, and they can proceed this way because of the enormous, like, underlying commitment of tax payer money, and that’s sort of one level of answer. Another level of answer is that the situation, like, there are no good answers for exactly how to proceed, sort of, in this, and it’s been Treasury’s position, you know, for a long time that ultimately legislation, you know, is needed to deal with this, and indeed that was the sense of the Congress resolution, also. But it’s not like there was sort of like, well, here’s the terrific way of approaching it because one way of doing it was, like, Treasury going okay, let’s, like, we want dividends, you know, let’s do that, you know, that turned out to be for a long time fairly, sort of, not, sort of, good, the, you know, for all the reasons, you know, that, you know, we’re discussed in the brief, and, you know, and there was, you know, that very severe spiral. So, one answer is to go, and the parties could have decided this, sort of, like, right at the beginning could go look, here’s what, you know, we’ve put a lot of money on the line, we’re going to waive our periodic commitment fee, we’re also entitled to dividends, but we don’t want to put you under, we don’t want you making draw on the commitment, so what we’ll do is it’s unclear when and if and to what extent you’re ever going to be making profits, but we will take that risk, and, you know, and maybe there will be quarters where we do like with Treasury and the tax payer, like Noel, you know, and then there will be others where we don’t get anything at all. And that, they could have decided to do that right at the outset. And in fact, the way that it’s played out is that yes, as it happened there was, like, a big spike, sort of, in 2013, sort of, in profitability, which was all but largely from the one time recognition of the tax deferred assets, goes down notably the next year, the year after that in 2015 would have been paying under the old dividend arrangement than they were paying under the Third Amendment, and you don’t know what’s going to happen. And this Treasury commitment, like, I mean, 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 approximately of tax payer money that the enterprises can draw on, and that is absolutely crucial to their existence. And this is what these review provisions, you know, which is what is at issue here, are designed to protect is no, we don’t get to fight about exactly what the conservator thought was the best way of dealing with this very difficult situation, and to say well, you know, a really good conservator would have done something else, I think that what they did was entirely appropriate and sensible, 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 as ultra vires in the sense that there’s an explicit statutory prohibition, and you stepped over that line. There’s nothing like there here even alleged.


Judge Millett presented a hypothetical “Let’s assume the worst administrative record possible and let’s take of the money and leave them with NOTHING”. Mr. Stern replied “I think that a conservator could do that given the position under 4617(a)(2)”. Judge Ginsburg disagreed.

JUDGE MILLETT: Well, they would say imagine if, assume the worst record, administrative record possible, and that is that it turns out everybody lined up saying woo-hoo, they’re now solvent, and we think they’re going to stay solvent for the next three or four years, let’s take, let’s have a new agreement here, and we’re going to take all of that money and leave them not a penny to get back on their feet with, could a conservator do that? I’ve just taken the worst administrative record possible, would that prove their case that you weren’t acting as a conservator?

MR. STERN: I mean, I think that a conservator could do that given the position, like, the extent to which, like, the ongoing Treasury commitment, you know, is crucial, they could decide that, 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 adduced, like, sort of would support that kind of claim, I mean, like, what Mr. Olson says, you know, when you asked is, like, would it make a, would it have made a difference, like, if everything had gone, like, south, like, in a big way, you know, for the next few years, and the answer was no. It was, you know, the — it’s a standalone, I mean, there’s, you know, they’ve got two variance, one of them is well, you know, they should have known in 2012 that things were going to be better at least for awhile, but the more fundamental one is no, this is just a deal you can’t do, doesn’t matter how good, like, it’s going to be, how much it’s going to advance, sort of like, sort of the interests of everybody involved in a very difficult and perhaps I always hate to say unique, but perhaps unique situation.

JUDGE GINSBURG: The administration took a position I think a year earlier, I think in 2011 that the GSE should be wound down, right? There’s a white, you know, you know, a press release or something like that, but then comes the Third Amendment, and it’s now concrete, we’re going to wind down these GSEs, but we’re not going to pull the receivership trigger, which would, of course, have required, we’re expecting the liquidation preferences of the Plaintiffs.

MR. STERN: Well, it’s not a liquidation, and the statute, I mean, first of all, the statute specifically contemplates, like, the wind down as being a power that can be asserted, like, in the conservatorship, you know. But it’s, like, what –

JUDGE GINSBURG: Does it? Where is that?

MR. STERN: It’s in, it’s 4617(a)(2), 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.

JUDGE GINSBURG: Yes, well, as I read that, it’s, the word respectively is implicit in there.

Judge Ginsburg translates Treasury’s announcement and got it right. Mr Stern explains Treasury is seeking congressional action while we wind them up because giving it back to shareholders is not a good alternative. Mr. Stern further explains taking away their net profits and selling off their portfolio shouldn’t be considered moving towards liquidation. You know there is liquidation when we liquidate. (huh)

JUDGE GINSBURG: 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.

MR. STERN: I don’t remember that language.

JUDGE GINSBURG: Yes. You may be confusing it with Tortego (phonetic sp.). But that was the gist of it, 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.

MR. STERN: Well, I think what Treasury has said repeatedly is that it thinks that congressional action is appropriate, and we’ve discussed, like, the difficulties of recapital

JUDGE GINSBURG: But defending the congressional action it has to live within the statute it’s got.

MR. STERN: Yes, and it is. I mean, because the alternatives are not good ones, I mean, it’s not, like, what they had wasn’t a good alternative, I mean, that wasn’t doing well. What’s happened now it’s like they’re all sort of things to deal with a very difficult situation, and –

JUDGE GINSBURG: Well, 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.

MR. STERN: No, Your Honor, I don’t think that this is a move towards liquidation, there has not been a liquidation, and again –

JUDGE GINSBURG: Well, they could move slowly considering the size of the portfolio —

MR. STERN: Well, but —

JUDGE GINSBURG: — they would have to move slowly.

MR. STERN: — and they could legitimately do that, like, if that’s what they wanted to do, they could do that.

JUDGE MILLETT: So, if you’re moving —

MR. STERN: There’s nothing wrong with a conservator doing that.

JUDGE MILLETT: If you’re in the moving stage, you’re not yet liquidating, is that something conservators do, or can only a receiver do the moving to liquidation?

MR. STERN: You can move towards a, I mean, a conservator can properly go, you know, we’re going to, like, sort of that this isn’t working, we’re going, like, we need to set the stage for liquidation. I don’t say that that is what’s happening here at all, I have no reason to believe that that’s the case. I’m just saying that a conservator could do that, and the statute specifically refers to rehabilitating, reorganizing, winding, and winding up, those are all things that you, like, even if it didn’t say that –

JUDGE MILLETT: How would we know when winding up stop and liquidation begins?

MR. STERN: Because you see a liquidation. I mean, like, you know, right now this, like, these things, these enterprises are functioning, they’re performing their statutory purpose, that’s what that legislation was all about. And, like, the stockholders, like, you know, are not the people who Congress wanted to sort of, like, be able to come in —

JUDGE GINSBURG: All right. Okay.

MR. STERN: — and sue, and that’s all that this, like, 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.

JUDGE GINSBURG: Let’s say that it said that directly, the stockholders may not sue, okay? Shareholders may not sue. That surely means in their capacity as shareholders, right? Creditors can sue, right? Tradesmen can sue?


JUDGE GINSBURG: Okay. So, they’ve come in in part asserting what they say are direct claims, not derivative claims, right? Not in their capacity as a, not — in other words, the succession clause succeeds their rights as shareholders, but their, which would be their derivative rights.

MR. STERN: Well, I mean, again, I mean, the language is, like, 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, I mean, that’s really broad. But as we discuss in our brief, like, these are, I mean, these are quintessential derivative claims, what they’re saying is that the conservator, like, isn’t, like, minding the store –

JUDGE GINSBURG: Well, if it’s a —

MR. STERN: — like, in looking after the enterprises.

JUDGE GINSBURG: If it’s a quintessential derivative claim then the relief accrues to the corporation and not to them, right?


JUDGE GINSBURG: And they want their liquidation preferences, that’s not an asset of a corporation.

MR. STERN: Well, I mean, that’s what they say, but what they want, I mean, yes, I mean, everybody wants money for themselves sooner or later, I mean, like, you know, that’s always the feature.

JUDGE GINSBURG: But the question is whether they want it directly or through the corporation.

MR. STERN: Right, and they want it, but they

JUDGE GINSBURG: They say they want it directly.

MR. STERN: What they want is they’re saying that the value of their shares, I mean, like, I mean, they don’t, you know, they don’t want this in liquidation, they don’t want liquidation preferences, they want the value of their shares to go up, you know, they sort of, like, you know, at this point we’re talking largely about speculators, and the idea of speculation is quite, you know, legitimate, you buy low, you try to sell high, they’re going my shares would be, like, higher, you know. Fair enough. But Congress has also said you don’t get to bring these lawsuits.

JUDGE GINSBURG: Well, they had a preexisting right to bring the lawsuit, the succession clause takes away something.

MR. STERN: Yes, it takes away.

JUDGE GINSBURG: But does it take away a direct claim? 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. If he were also a tradesman he’d still retain his trade account.

MR. STERN: Yes. That’s right. 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 they should be compensating Treasury. I mean, and the claims are, like, are derivative of what they say is the harm to the enterprises, and again —

JUDGE GINSBURG: Well, that’s a question of Delaware and Virginia law, correct?

MR. STERN: Well, I think it’s, I mean, we’ve argued and I think correctly in our brief that this is a matter of federal law, but federal law, like, sort of, I don’t think that there’s a —

JUDGE MILLETT: Well, 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. So, that sure sounds like they’re not getting a recovery, correct?

MR. STERN: I think it’s a derivative claim, Your Honor.




*****FDIC expresses NO view on whether FHFA as a conservator is the United States
for purposes of sovereign immunity or the FTCA.  (Why file an Amicus Brief when the focus is on Receiver)