Tag Archives: FDIC

FIRREA Wall

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Courts have read the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) very broadly, giving the federal government a powerful weapon in its lawsuits against financial institutions regarding events relating to the financial crisis. Judge Swain (SDNY) has issued a rare Opinion and Order limiting the reach of FIRREA, FDIC v. Bear Stearns Asset Backed Securities I LCC et al. (No. 12CV4000, Mar. 24, 2015), a suit over allegedly rotten residential mortgage-backed securities.

The limitation derives from a pretty technical Supreme Court opinion, CTS Corp. v. Waldburger. In CTS, the Supreme Court held that statutes of repose were not preempted by a statute that has identical language as the FDIC Extender Provision found in FIRREA and at issue in FDIC v. Bear Stearns.

I warned you that this is technical, so here is what is at issue:

Claims brought under Section 11 of the 1933 Act are subject to the two-pronged timing provision of Section 13 of that Act, which is codified as 15 U.S.C. § 77m. The first prong of Section 13 is a statute of limitations, which provides that Section 11 claims must be brought within one year of “the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C.S. § 77m (LexisNexis 2012). The statute of limitations may be tolled based on equitable considerations, but not beyond three years from the date of the relevant offering, at which point a plaintiff’s claim is extinguished by Section 13’s second prong – a statute of repose – which provides that “[i]n no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public.” Id.

The FDIC asserts that its claims are timely, notwithstanding the three-year Section 13 statute of repose, because the statute of repose is preempted by the FDIC Extender Provision . . .. (6)

Relying on CTS Corp. v. Wadburger, the Judge Swain concludes that “the FDIC Extender Provision does not preempt the statute of repose set forth in Section 13 of the 1933 Act.” (14-15)

The reasoning in FDIC v. Bear Stearns does not apply to all FIRREA claims, but it would apply to some meaningful subset of them. One of the most powerful things about FIRREA is its very long statute of limitations. If other courts follow FDIC v. Stearns, it could have a meaningful impact on the reach of FIRREA.

Tuesdays Regulatory & Legislative Round-Up

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Krimminger and Calabria on Conservatorships

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When the Federal Housing Finance Agency (“FHFA”) was appointed conservator for Fannie Mae and Freddie Mac, it was the first use of the conservatorship authority under the Housing and Economic Recovery Act of 2008 (“HERA”), but it was not without precedent. For decades, the Federal Deposit Insurance Corporation (“FDIC”) has successfully and fairly resolved more than a thousand failing banks and thrifts using the virtually identical sections of the Federal Deposit Insurance Act (“FDIA”).
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The predictability, fairness, and acceptance of this model led Congress to adopt it as the basis for authorizing the FHFA with conservatorship powers over Fannie Mae and Freddie Mac in HERA. Instead of following this precedent, however, FHFA and Treasury have radically departed from HERA and the principles underlying all other U.S. insolvency frameworks and sound international standards through a 2012 re-negotiation of the original conservatorship agreement.
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     This paper will:
  • Describe the historical precedent and resolution practice on which Congress based FHFA’s and Treasury’s statutory responsibilities over Fannie Mae and Freddie Mac;
  • Explain the statutory requirements, as well as the procedural and substantive protections, in place so that all stakeholders are treated fairly during the conservatorship;
  • Detail the important policy reasons that underlie these statutory provisions and the established practice in their application, and the role these policies play in a sound market economy; and
  •  Demonstrate that the conservatorships of Fannie Mae and Freddie Mac ignore that precedent and resolution practice, and do not comply with HERA. Among the Treasury and FHFA departures from HERA and established precedents are the following:
    • continuing the conservatorships for more than 6 years without any effort to comply with HERA’s requirements
      to “preserve and conserve” the assets and property of the Companies and return them to a “sound and solvent” condition or place them into receiverships;
    • rejecting any attempt to rebuild the capital of Fannie Mae or Freddie Mac so that they can return to “sound and solvent” condition by meeting regulatory capital and other requirements, and thereby placing all risk of future losses on taxpayers;
    • stripping all net value from Fannie Mae and Freddie Mac long after Treasury has been repaid when HERA, and precedent, limit this recovery to the funding actually provided;
    • ignoring HERA’s conservatorship requirements and transforming the purpose of the conservatorships from restoring or resolving the Companies into instruments of government housing policy and sources of revenue for
      Treasury;
    • repeatedly restructuring the terms of the initial assistance to further impair the financial interests of stakeholders contrary to HERA, fundamental principles of insolvency, and initial commitments by FHFA; and
    • disregarding HERA’s requirement to “maintain the corporation’s status as a private shareholder-owned company” and FHFA’s commitment to allow private investors to continue to benefit from the financial value of the company’s stock as determined by the market. (1-3, footnotes omitted)

I am intrigued by the recollections of these two former government officials who were involved in the drafting of HERA (much as I was by those contained in a related paper by Calabria). But I am not convinced that their version of events amounts to a legislative history of HERA, let alone one that should be given any kind of deference by decision-makers. The firmness of their opinions about the meaning of HERA is also in tension with the ambiguity of the text of the statute itself. The plaintiffs in the GSE conservatorship litigation will see this paper as a confirmation of their position. I do not think, however, that the judges hearing the cases will pay it much heed.

Reiss on $17 Billion BoA Settlement

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Law360 quoted me in BofA Deal Shows Pragmatism At Work On Both Sides (behind a paywall). It reads in part,

Bank of America Corp.’s $16.65 billion global settlement over its alleged faulty lending practices in the run-up to the financial crisis may have made bigger waves than recent payouts by JPMorgan Chase & Co. and Citigroup Inc., but attorneys say the deal still represents the best possible outcome for the bank and for federal prosecutors, who can now put their resources elsewhere.

The settlement, inked with the U.S. Department of Justice, Securities and Exchange Commission, the Federal Housing Finance Agency, the Federal Deposit Insurance Corp., the Federal Housing Administration and the states of California, Delaware, Illinois, Kentucky, Maryland and New York, released most of the significant claims related to subprime mortgage practices at Countrywide Financial Corp. and investment bank Merrill Lynch, both of which Bank of America picked up during the crisis.

Although the hefty price tag, which includes $7 billion in consumer relief payments and a record $5 billion in civil penalties, is nothing to balk at, the settlement will help Bank of America avoid a series of piecemeal deals that could stretch out over a much longer period without the prospect of closure, according to Ben Diehl of Stroock & Stroock & Lavan LLP.

“They want to start being looked at and considered by the market, their customers and regulators based on what they are doing today, in 2014, and not have everything continue to be looked at through the perspective of alleged accountability for conduct related to the financial crisis,” said Diehl, who formerly oversaw civil prosecutions brought by the California attorney general’s mortgage fraud strike force.

And the bank isn’t the only one looking for closure, according to Diehl.

“It’s in a regulator’s interest as well to be able to look at what is currently being offered to consumers and have a dialogue with companies about that, as opposed to talking about practices that allegedly happened six or more years prior,” he said.

The government also saw great value in getting a big dollar number out to a public that has expressed frustration over a perceived lack of accountability of financial institutions for their role in the financial crisis.

“The executive branch get a big news story, particularly with the eye-poppingly large settlements that have been agreed to recently,” said David Reiss, a professor at Brooklyn Law School, who added that the federal government also has an interest in global settlements that keep the markets running more predictably.

Running CERCLA around FIRREA

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Law360 quoted me in High Court Environmental Ruling Could Clear Air For Banks (behind a paywall). The article reads in part,

A recent U.S. Supreme Court ruling that a federal environmental law does not preempt state statutes of repose has inspired banks and other targets of Wall Street enforcers to test the decision’s power to finally fend off lingering financial crisis-era cases on timeliness grounds.

The high court on June 9 found that the Comprehensive Environmental Response, Compensation and Liability Act could not extend the 10-year statute of repose in a North Carolina environmental cleanup suit in the in CTS Corp. v. Waldburger case. Although the decision pertained to a case outside of the financial realm, attorneys say it could limit the ability of federal financial regulators to bring claims on behalf of failed financial institutions under two of their favored tools: the Financial Institutions Reform, Recovery and Enforcement Act and the Housing and Economic Recovery Act.

That’s because the defendants in those cases, including banks but others as well, will now be able to argue that regulators like the National Credit Union Administration, the Federal Housing Finance Agency and the Federal Deposit Insurance Corp. missed their chance to bring claims on behalf of institutions in receivership.

Given the Supreme Court’s interpretation, the regulators may be on shaky ground.

“The government is going to have a much more difficult time sustaining the arguments it’s been making after CTS,” said Jeffrey B. Wall, a partner with Sullivan & Cromwell LLP and a former assistant solicitor general.

In its CTS ruling, the Supreme Court found that CERCLA does not preempt state statutes of repose like the one in North Carolina, citing CERCLA’s exclusive use of the phrase “statute of limitations.”

Statutes of repose and statutes of limitations are distinct enough terms in their usage that it’s proper to conclude that Congress didn’t intend to preempt statutes of repose when it crafted CERCLA, Justice Anthony M. Kennedy said in the majority opinion. The justice cited a 1982 congressional report on CERCLA that recommended repealing state statutes of limitations and statutes of repose but acknowledged that they were not equivalent.

According to a memo released June 10 by Sullivan & Cromwell, both FIRREA and HERA are susceptible to similar readings by courts.

Both statutes include extenders that allow government agencies suing on behalf of failed financial institutions to move beyond statutes of limitations on state law claims. However, much like CERCLA, both say nothing about extending statutes of repose, the memo said.

And that could make a major difference for a large number of defendants trying to fend off claims from the FDIC, NCUA and FHFA, Wall said.

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The CTS ruling is likely to play out in cases brought by financial regulators in smaller cases over losses incurred by failed financial institutions using FIRREA and HERA. But FIRREA has also become a favored tool in the U.S. Department of Justice’s big game hunts against ratings agency Standard & Poor’s and Bank of America.

Because those cases are largely predicated on federal claims, the CTS case is unlikely to be a help for those institutions, according to Brooklyn Law School professor David Reiss.

“I don’t read it as having an extension on the higher-profile FIRREA cases,” he said.

But even if CTS is limited to state law claims brought by financial regulators, that could have a major impact given the sheer number of cases the FDIC, NCUA and FHFA bring.

Reiss on FHFA Leadership of Housing Finance Reform

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Law360.com quoted me in FHFA Set To Take The Lead In Housing Finance Reform (behind a paywall). It reads in part,

With hopes for a legislative fix for the U.S. housing finance market fading after six key Democrats reportedly refused to support a reform bill pending in the Senate Banking Committee, the Federal Housing Finance Agency will become the central player in reshaping the market and set the terms for any future changes.

The Banking Committee’s leaders — Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho — were unable to scare up the overwhelming support their housing finance reform bill needed in a last-gasp effort at getting a vote from the full Senate. That leaves the bill’s prospects of getting to President Barack Obama prior to the midterm elections at near zero and the FHFA, the conservator for Fannie Mae and Freddie Mac since 2008, as the biggest player in reshaping the U.S. housing market.

“It was always my operating assumption that it was going to be exceedingly difficult to get congressional consensus. Most of the action was going to take place by way of the actions at the FHFA,” said former Republican Rep. Rick Lazio, now a partner at Jones Walker LLP.

The lack of legislation also throws a wild card into the equation, since FHFA head Mel Watt has essentially been silent about his intentions for the FHFA since he won Senate confirmation in December.

“Hopefully, Watt will have a positive vision of the future of the two companies,” said Brooklyn Law School professor David Reiss.

More than five years after Fannie Mae and Freddie Mac were placed under FHFA conservatorship after receiving a more-than-$187 billion taxpayer bailout in the fall of 2008, Congress has yet to act on creating a new system for home purchases and eliminating the two companies.

And then, beginning last spring, Congress kicked into gear.

First, Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va., introduced a bill that Johnson and Crapo would use as the basis for their own legislation, leaving a limited role for government in guaranteeing the mortgage market.

Soon after, the House Financial Services Committee passed its own housing finance reform bill looking to eliminate the government’s role in the housing market entirely.

Johnson and Crapo released their bill, which would eliminate Fannie and Freddie within five years and replace it with a mortgage insurance agency modeled on the Federal Deposit Insurance Corp., in March. They scheduled a markup and vote on the bill for late April.

But the two senators delayed the vote at the last minute when it became clear that while they had the 12 votes needed to pass the bill out of the 22-member committee, they lacked the 16 to 18 votes needed to force Senate Majority Leader Harry Reid to bring it up for a vote.

Johnson and Crapo said they would continue negotiations with six undecided Democrats, but according to media reports, those negotiations foundered on worries about access to affordable housing in the bill.

Undeterred, Johnson vowed to bring the bill up for a vote next week.

“Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week,” Sean Oblack, a Democratic spokesman for the committee, said in a Thursday statement.

Still, the failure to get overwhelming support for the Johnson-Crapo bill essentially dooms the prospects for housing finance legislation this year, Lazio said.

“The administration will probably wait until early next Congress to make a decision about whether they think reform is possible,” he said.

But reform efforts will not stop, since the FHFA has a large amount of discretion over the futures of Fannie Mae and Freddie Mac.

“The regulator here is very powerful,” Reiss said.

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Inside Johnson-Crapo

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Enterprise Community Partners, Inc. has posted Inside Johnson-Crapo: What the Senate Housing Finance Reform Bill Could Mean for Low- and Moderate-income Communities. Parsing the various Congressional proposals for housing finance reform is hard enough for an expert, let alone for an interested observer. This policy brief provides a helpful overview of the proposal that is setting the terms for the debate today, with a focus on low- and moderate-income homeownership. Its key findings include:

  • The bill, called the Housing Finance Reform and Taxpayer Protection Act of 2014 or S. 1217, lays a clear and thoughtful path forward for the nation’s housing finance system, including the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
  • A new federal agency, modeled after the Federal Deposit Insurance Corporation, would oversee the entire secondary mortgage market and establish a new system of government-insured mortgage-backed securities (MBS). In exchange for a fee, the agency would provide limited insurance against catastrophic losses on qualifying securities issued by private companies. Investors in the private companies would need to incur significant losses before the insurance pays out to holders of the MBS. The bill also winds down Fannie Mae and Freddie Mac, the mortgage companies that were placed under government conservatorship in 2008.
  • The bill includes several provisions to ensure that the new system adequately serves low- and moderate-income communities. First, it requires any issuer of government-insured securities to serve all eligible single-family and multifamily mortgages. Second, it preserves the GSEs’ current businesses for financing rental housing, while ensuring that those businesses continue to support apartments that are affordable to low-income families. Third, it requires issuers to contribute funding to programs that support the creation and preservation of affordable housing. Finally, it creates new market-based incentives to serve traditionally underserved segments of the housing market.
  • Enterprise strongly supports the direction laid out in this bill and appreciates the inclusion of important multifamily provisions. At the same time, we suggest several proposals to further strengthen the bill. Among other things, we recommend that lawmakers promote a level playing field among eligible risk-sharing models; authorize the federal regulator to enforce the bill’s “equitable access” rule; expand the scope of the affordable housing fee; simplify the incentives for supporting underserved market segments; and establish separate insurance funds for single-family and multifamily securities. (1)

The left has criticized Johnson-Crapo for not doing enough for low- and moderate-income homeownership. The right has criticized it for leaving too much risk with the taxpayer. But it seems that a broad center finds that the outline provided by the bill provides a way forward from the zombie-state housing finance finds itself in, with a Fannie and Freddie neither fully alive nor fully dead. Nobody seems to think that a bill will pass this year. But hopefully Congress will keep attending to this issue and we can soon see a resurrected housing finance system, one that can take us through much of the 21st Century just as Fannie and Freddie got us through the 20th.