The Conservatorships of Fannie Mae and Freddie Mac: Actions Violate HERA and Established Insolvency Principles

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”). While the FDIC most often uses its receivership authority to resolve failing banks and thrifts, it rehabilitated dozens of weak financial institutions through open bank assistance and conservatorships by returning the banks and thrifts to full compliance with regulatory capital and other requirements, recouping the FDIC’s investments in the institution, if possible, and treating stakeholders fairly. If the bank or thrift could not meet regulatory requirements, it was resolved through the FDIC’s well-established receivership powers with statutory protections for all stakeholders. This approach has been recognized by the courts, Congress, and the public as providing invaluable predictability, fairness, and stability. The success of the FDIC’s approach to rehabilitating or resolving failing banks and thrifts has led it to become the principal international model used by the Financial Stability Board and national regulators.

Michael Krimminger and Mark A. Calabria

The Cato Institute

February 9, 2015

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