The Economics of Reform
























208 thoughts on “The Economics of Reform

    1. ROLG,
      I believe I read somewhere that the Supreme Court will make a decision to hear the case at the conference and the decision will be announced on the following Monday ( Feb. 19th ) as to whether they will hear the case. That would mean we would hear fairly quickly whether or not they will hear the case. Can you confirm?


        1. ROLG,
          Thanks for the calendar info. I forgot about the holiday. In any event it sounds like we should know if the Supreme Court will hear the case in the next month or so. I feel less confident in the ROPS / Bhatti cases with the latest en banc decision with the PHH case which makes for me the Supreme Court hearing the case that much more critical. I really had promise for the ROP / Bhatti cases before the decision yesterday.


          1. @jerry

            the DC circuit is majority Obama administration appointees, and likely to uphold an administration agency’s argument, especially when the case goes to actual validity of the agency as structured. SCOTUS is far less skewed to favor an administrative agency agenda. interestingly, scalia was far more supportive of agency action than is his replacement gorsuch.

            in any event, jerry is right and the PHH case needs a client willing to pay the legal bill to petition for cert. we should hear about that soon, and if i were a betting man, i would wager that the PHH cert petition is forthcoming as is SCOTUS acceptance of the case.


          2. I scanned PHH vs CFPB. Judge HENDERSON understood laws better and the prior relevant cases more accurately than the majority. I felt he was like Judge Brown making things simpler. The majority was like a computer grading job applications. I trust SCOTUS.


  1. the briefing for SCOTUS to grant cert review of the perry dc circuit court opinion is finished.

    reasons for review are to: i) resolve a split among circuits relating to whether shareholders can maintain derivative actions where fhfa has a manifest conflict of interest (see class action plaintiffs’ reply brief:, and ii) because of the importance of the decision in terms of dollar amount at issue, the misinterpretation of “may” as improperly expanding upon any limitation on fhfa’s discretion under the statute, and the need to prevent fhfa from insulating Treasury from committing explicit violations of its duties under the statute (see fairholme reply brief: and perry reply brief:

    will SCOTUS grant cert? cant tell. when will we know of SCOTUS’s decision? dont know. if SCOTUS grants cert, however, the legislative/administrative reform timeline will have to accommodate a delay likely past 2018 elections.


    Liked by 1 person

    1. fortunately or unfortunately, today is law day.

      the dc circuit en banc held in PHH that the cfpb is constitutionally structured (in effect reversing the dc circuit merits panel decision):$file/15-1177.pdf

      fhfa is similar in many respects to cfpb. the bhatti and rop cases just starting out in federal district courts seek to invalidate the NWS based, in part, upon the argument that fhfa is unconstitutionally structured.

      i say in part because the bhatti and rop cases also seek to invalidate the NWS based upon argument that the fhfa director at time of NWS was appointed in violation of the appointments clause of US constitution.

      that appointment clause argument IS being heard at SCOTUS in Lucia and interestingly the US Solicitor General agrees with plaintiffs in that case that the SEC law judges were improperly appointed (lending support to the bhatt and rop appointment clause violation argument).

      i feel confident that SCOTUS will grant cert in PHH. this case goes right to the heart of the structuring, independence and discretion of administrative law, which is a big constitutional question that i believe SCOTUS will want to resolve.


      Liked by 3 people

        1. @anon

          either the industry will fund the appeal (as you say PHH no longer has a monetary incentive) because it has a continuing interest in the claim even though corkery is out, or the other case (name not at my fingertips) teed up before the DC circuit that is a pure constitutional claim will go on up. gibson dunn may even stay on case for reduced fee etc. ted olson is the olson in morrison v olson, a case that would likely be overturned if SCOTUS takes PHH and reverses. there is skin in the game for olson.


    2. I’ve read all three reply briefs by plaintiffs’ counsel, and–although I’m admittedly biased–found them to be persuasively argued. Now we wait to see whether the Supreme Court justices decide to hear the case. I certainly hope they do. With legislative mortgage reform efforts (again) seemingly on the verge of failure–based on how far the just-leaked Senate “staff discussion draft 29” is from anything that could possibly gain enough bipartisan support to pass–it looks as if inertia and the appeal to most parties of the status quo of conservatorship may be about to reassert themselves. We could use a victory for the plaintiffs somewhere in panoply of court cases to serve as a stir to administrative action.

      Liked by 2 people

      1. @bill and tim

        essentially there are three legal irons in the fire: i) the fairholme court of claims case which has finished discovery and the next step is an amended complaint and defendants’ motion to dismiss, arguing that even if NWS is permitted by HERA, it effected an unconstitutional taking of shareholder’s property interests in their shares–relief is money damages; ii) the perry appeal to SCOTUS, arguing that NWS violated HERA–relief is voiding NWS; and iii) the bhatti/rop cases, arguing that fhfa was unconstitutionally structured at time of NWS adoption (and still is), and that then fhfa acting director who adopted NWS was not properly appointed by president and confirmed by senate (was acting without constitutional appointment for three years at time of NWS…longest period constitutionally recognized for recess appointments, which is an analogy to an acting director, is two years).

        i could go on, but the takeaway is that if you have reached the conclusion that the senate banking committee draft #29 is just a start and a meager one at that, you need to add to that the notion that it doesnt begin to address the outstanding litigation, which no respectable piece of legislation should ignore. indeed perry, the only case that could basically go away during the legislative timeframe before 2018 elections, will itself persist post 2018 elections if SCOTUS grants cert.

        the relevance of the PHH case is that the claim that fhfa is unconstitutional structured likely wont be resolved until after SCOTUS grants cert re PHH case, which i believe it will.

        so the senate banking committee draft can ignore the litigation, but it seems to me that a comprehensive legislative “solution” to GSE/housing reform, which Mnuchin apparently wants, should address the litigation which is on track to continue well beyond the 2018 elections.


        Liked by 1 person

  2. Tim,

    Finally, the Senate Hearing video w Mnuchin is finally up on the Senate’s website:

    When you have a chance, listen to Corker questioning Mnuchin on Housing Finance Reform and please share your thoughts. In particular Corker tests Mnuchin on several points, in particular he gets him to acknowledge guaranteeing MBS securities & not the entities, then unsuccessfully pushes hard on Administrative reform & possible receivership, and for the first time on camera, potentially acknowledges shareholder rights It starts at 1hr:14min:50sec…


    1. I’ve now listened to the Corker/Mnuchin session, and have a few reactions worth mentioning. First, you missed a subtlety on the “guarantee the MBS” issue. Corker phrased his question about guaranteeing MBS versus entities this way: “If we have a government guarantee in the future, would it not be your preference that it be at the actual security level and not the entity level?” To which Mnuchin responded, “That would be my preference.” That’s not the same as Mnuchin saying he thinks there SHOULD be a government guaranty on MBS. Second, when Corker asked Mnuchin if he had “thought about” receivership for Fannie and Freddie, Mnuchin declined to take the bait, responding, “We’ve thought about and considered lots of things; I don’t really want to go through in this format publicly all the different alternatives you and I have spoken [about].”

      But I think the most interesting exchange was around the topic of legislative mortgage reform. Corker asked Mnuchin what Treasury’s options would be if Congress didn’t act. When Mnuchin gave Corker the response I’m sure he thought Corker was looking for—“There are certain options we have; these entities are very complicated; I would just say my strong preference would be to work with Congress on a bipartisan basis to reach a long-term solution,” Corker paused for a moment, then said in a low, flat monotone, “Yeah.” Then he added, “But in the event this great bipartisanship doesn’t survive, and we don’t get this done—it’s a very complicated topic—what are some of the steps you might take?” Having just finished reading the “Staff discussion draft 29” of what’s been called Corker-Warner 2.0—which as I note below totally punts on all of the difficult implementation issues associated with replacing Fannie and Freddie with the proposed 5 to 6 de novo credit guarantors—I strongly suspect Corker knows this legislation isn’t going anywhere. His answer to Mnuchin’s call for bipartisan legislation certainly seemed (to me) to reflect that.

      Liked by 3 people

      1. [Edited for length and clarity.] I agree with your observations.

        Corker’s response seemed to signal that he is resigned to the fact that the path forward will proceed through Treasury / FHFA. Mnuchin confirmed his position as lead dog to me when he laid out his terms for working with congress on reform towards the end of the hearing when provided the opportunity to speak openly (no specific question asked – just killing time.)

        The relevant time stamp from C- Span hearing video is 2:10:46 – 2:11:30.

        However what concerned me was the following quote:

        “I hope we do figure out a solution to this so that we don’t leave these entities around for another 10 years.”

        Given past language used, do you think he meant to say “…another 10 years in their current state (conservatorship)”?

        Or do you think it was perhaps a rare unmeasured statement, where in fact Mnuchin is open to a multiple guarantor model with an explicit guarantee on MBS directly and without the existence of the GSE’s in the future?

        In this clip he also seems to imply that he isn’t convinced an explicit guarantee is necessary on MBS directly…..but that there should be compensation for any IMPLICIT guarantee provided.

        Essentially, could you please review the above mentioned clip and provide any insights or clarifications.


        1. It’s clear to me that Mnuchin meant to say he didn’t want to leave Fannie and Freddie around for another 10 years in conservatorship (had he meant “leave them around at all” he wouldn’t have added the 10 year period).

          In this appearance before the Senate Banking Committee Mnuchin spoke in very general terms about possible alternatives for reform–both legislative and administrative–and didn’t explicitly rule anything out, including getting rid of Fannie and Freddie. But in an interview at a Wall Street Journal CEO Council session last November, he did. An interviewer said to him, “A lot of very conservative economists have been arguing a long time [that Fannie and Freddie] are fundamentally market-distorting institutions and that they should just be done away with. Would you go that far?” Mnuchin responded, “No, I wouldn’t,”

          On the issue of an explicit government guaranty Mnuchin was noncommittal, saying, “We don’t have to do that,” but he went on to say, “If we DO [put the taxpayer at risk with a government guaranty], that the taxpayer be compensated and that there won’t be any implicit guaranty that they’re not compensated for.” I read that as Mnuchin saying that if there is some form of federal “embrace” of the new versions of Fannie and Freddie short of an explicit guaranty–that allows the range of domestic and international investors to hold the companies’ MBS as eligible investments–this arrangement would need to be paid for.

          Liked by 1 person

          1. Not sure what admin reform can do. Can it guarantee MBS issued by other than GSEs like Citi? Can it force Citi to contribute to affordability fund? I feel that authorization should be only from Congress.


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