Guest post by Joe Hoffmann
The Supreme Court heard Collins v. Mnuchin on Wednesday, December 9th. This important and complicated case will determine the constitutionality of the Federal Housing Finance Agency’s (FHFA) structure. The lawsuit is brought by investors in Fannie Mae and Freddie Mac hoping to reverse the Obama-initiated “100 percent net worth sweep policy,” which effectively funneled all of Fannie and Freddie’s considerable profits into the Treasury. While the Treasury Department is the defendant in the case, the Trump administration is not challenging the appeals court’s finding that the FHFA is unconstitutional, though it still wants to protect the net-worth sweep policies.
This is both bizarre and counter-productive. It is bizarre because Trump’s political appointees at the FHFA have initiated plans to take Freddie and Fannie out of conservatorship, which would likely result in a settlement with Fannie and Freddie’s investors that would end the litigation. The Trump administration’s approach to Collins v Mnuchin is counter-productive because its defense of the “100 percent net worth sweep policy,” if successful, would simply enhance the power and purse of a potential Biden Treasury Department.
This is especially disturbing given what Revolver has learned from a Senior Administration source about what Biden’s priorities would be at that department. Indeed, according to this senior source, Biden transition officials have stated that the three priorities for a Biden Treasury would be “Covid, racial justice, and climate change.” Even many career officials were taken aback at the overtly ideological agenda Biden has in store for the Treasury Department.
The stakes of Collins vs. Mnuchin are therefore higher than that of a typical Supreme Court case involving mundane separation of powers questions which only affect Wall Street.
To be sure, taking Fannie and Freddie out of conservatorship would benefit certain investors and harm others. Investors in Blackwells Capital, which filed on the case, support the plaintiffs, while investors who profit off the incumbent banks, such as BlackRock, want to make it more difficult to take the GSEs out of conservatorship.
Ultimately, however, the situation provides an opportunity for Trump and the right to think strategically. Instead of focusing on what position is more “free market,” or focusing on procedural issues around separation of powers, we should instead take a look at the classic question of power, “who, whom” — that is, who benefits and who loses.
As a bit of background in the case, in 2008, during the financial crisis, the Treasury bailed out Fannie and Freddie on the condition that FHFA would supervise them under a conservatorship to ensure they paid back the government. In 2012, the Obama administration began the so-called 100 percent net worth sweep policy, which effectively transfers all Fannie and Freddie profits to the Treasury. Fannie and Freddie have more than paid off the debt, but the policy continues. The investors in Fannie and Freddie who are suing the government are eager to make a deal to end the conservatorship.
From a purely realpolitik standpoint, the current deal gives the Federal Government billions of dollars with none of the usual constraints from Congress and the ability to negotiate a deal with Fannie and Freddie investors. As Paul Bradford at American Greatness noted, the Obama administration doled out Fannie and Freddie money to Democrats in the past:
The two mortgage giants were ordered by then-FHFA director Mel Watt in December 2014 to dole out their profits to the Housing Trust Fund and the Capital Magnet Fund. These two funds ostensibly focus on low-income housing, but they act primarily to redistribute wealth to Democratic constituencies. [American Greatness]
The Left plays for keeps, so they support the current program. Unsurprisingly, Soros-funded non-profits like the Constitutional Accountability Project are filing briefs in favor of keeping the status quo. If Biden becomes president he will continue to use the 100 percent net worth sweep policy to fund projects that hurt the middle class.
Writing in the Washington Post, the Urban Institute’s Jim Parrott and woke Wall Street analyst Mark Zandi — the type of people likely to get high-ranking jobs in the Biden Administration — advocated using the FHFA to “bridge the racial wealth gap” and fund left-wing housing non-profits. They thus found it “disconcerting” that the “the Trump administration is considering turning [Fannie and Freddie] back over to private control even before [they] are adequately capitalized, in part simply to avoid giving the incoming administration a say in their future.”
If Fannie and Freddie’s shareholders prevail at the Supreme Court, the Biden administration will likely negotiate a settlement which will fund leftist non-profits and mandate various minority preferences in lending. The Obama Justice department frequently settled cases with banks under similar conditions. For instance, a settlement with Wells Fargo required that funds go to “qualified organizations” which offer “programs targeted at African American and Hispanic potential and former homeowners.”
Instead of responding to the Left’s naked use of power politics with appeals to free markets and the Constitution, the Trump administration should take a page from their book and start playing to win. A competent right-wing government would have used the funds in question to support the national interest and negotiate with the investors to take Fannie and Freddie out of conservatorship on the grounds that they scale back various “woke capital” projects. Yet for the most part, Mnuchin’s Treasury Department did little to redirect the money away from Democrat pet projects.
Thus, at this point, the most useful thing the Trump administration can do is negotiate an end to the conservatorship on the condition that Fannie and Freddie refrain from funding left-wing non-profits or promoting banks which give loans to under-qualified home buyers based on the color of their skin — actions which led to the housing crisis in the first place.
Joe Hoffman is a lawyer and former Capital Hill staffer.
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