Bryan Caplan  

What's the Legal Basis for the Freddie/Fannie Takeover?

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Give Me Some Fair Questions... Who Fails to Comprehend?...

Could someone who knows the law explain the legal basis for the Treasury's takeover announcement? The Wall Street Journal simply describes it as a "seizure." But the last time I checked, the legal procedure for the U.S. government taking stuff was more complicated than just saying, "Now it's mine."

What gives? Serious answers only, please. :-)


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COMMENTS (9 to date)
Bob writes:

Regulators (e.g., the FDIC) often have pretty broad latitude to take control of guaranteed institutions. I have not read the recent legislation that granted the Treasury authority to put money into the GSEs, but I've presumed all along that it granted them authority to take them over.

Shareholders can sue for damages if there are regulatory misdeeds, but it's hard to win. The only successful cases that spring to mind are when Congress passed FIRREA and eliminated regulatory capital, which had been granted to compensate buyers for acquiring failed thrifts, in the late 1980s.

Michael Manti writes:

The legislation that created (and later amended) the regulatory framework for Fannie and Freddie also authorized the government to take them into conservatorship under certain conditions. When it comes to the GSEs, the government can indeed say, "Now it's mine."

http://www.ofheo.gov/newsroom.aspx?ID=457&q1=1&q2=None

Lord writes:

This was a 'friendly' takeover by the treasury of institutions that had no other means of raising money. Thus equity holders were not totally wiped out as they would have been when they couldn't sell anything. The authorizing legislation merely recognizes their GSE status and the takeover the reality of their too big to fail status.

dWj writes:

The last post may glide over some things, but, on a technical basis, the boards of directors did officially vote in favor of this. That could have been for show, but it may have been necessary to facilitate the legal mechanisms actually used, if not necessarily the only ones that could have been used.

Chris Rushlau writes:

Probably the inquiry should be about the underlying regulatory structure. Lockhart and his own FDIC-type thing just for, what, these two entities, federal loan guarantors. If the two were too close to whimsical federal politics all along, that was the legal design problem, as it were. Congress guarantees loans and then guarantees--by soft regulation--the loan guarantors--when it should have "Chinese walled" itself out of the transaction at least by leaving their regulation to the FDIC or somebody used to boxing heads in the marketplace. Which legal design problem was heretofore papered over with the "too big to fail" anti-argument. As some foreign news outlet put it, this takeover only clarifies the mess federal policy has gotten us into. By clarifying who got us into it.

Taylor H writes:

ATTN: dWj,

- I'm a new student studying economics for the first time, I'm sure my naivete will show through but I must ask.. You stated that the board of directors passed a vote authorizing the government takeover. My question is this; what board of directors exactly are you reffering to?

R. Richard Schweitzer writes:

The two entities involved are unlike privately formed corporations. They are not, nor are participatory interests in them "private" property.

They are "creatures" of federal legislation.
Those who acquired participatory interests in the activities of such an entity did so within the limitations and risks of such participations.

Those who drink of the Milk of Federal Kindness can find it sours and even curdles.

Dr. T writes:

Most of the commenters are missing the point. The legal question isn't whether a private entity can agree to be taken over by the government. The legal question is what gives the federal government the authority to take over any company. Our government was not created to own and run businesses. The only exceptions I know of are those rare cases of court-ordered government receiverships. Michael Manti claims that the original legislation includes the option of government conservatorship, but have the conditions for this been met?

I am guessing that there is some law the administration can stretch to show that the takeovers are legal, but I would bet that it couldn't withstand a federal court challenge.

Michael Manti writes:

It is easy to double-check my claim. There's no need to guess about "some law" or bet on the outcome of a "federal court challenge."

Sec. 1367 of H.R. 3221, which became public law 110-289, lays out the conditions (e.g., inadequate capitalization) for conservatorship and receivership and for court challenges to such. (The text of H.R. 3221 is here: http://www.govtrack.us/congress/bill.xpd?bill=h110-3221) The fact sheet that I linked to cites that very law. IIRC, the 1992 act had similar provisions.

As Bob pointed out, regulated, government-chartered entities such as banks and GSEs are not just any companies. I am not a lawyer--just a guy who worked for 12 years at Freddie Mac, some of those spent on complying with the capital rules. But IMO, the legislation does grant Lockhart quite some latitude. (I'm not saying that he's exercising it properly, or that he should have it--or even that the GSEs should ever have been created, for that matter!)

Other statements from Lockhart are at http://www.ofheo.gov.

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