Last fall, I reported on some of the ways the Obama administration used federal regulatory powers to generate fine and assessment income for the government that could basically be used as a set of slush funds.
The highest profile use of the slush-fund money was distributing it to Obama’s favored far-left activist groups, like the National Council of La Raza and the National Community Reinvestment Coalition (NCRC). Perhaps more disquieting, however, was the reality that we simply don’t know what was done with most of the money.
Its use never had to be accounted for to Congress. Since it wasn’t appropriated by Congress for a named budgetary purpose, there is no effective audit trail on what happened to it. It went to the U.S. Treasury. But that by itself doesn’t mean it was put to a use the taxpayers – or the law – would approve of.
As noted in my September 2017 article, Jeff Sessions put a stop last year to the practice of awarding money from Justice Department settlement fines to activist groups. That was a step in the right direction.
Another agency, the Consumer Financial Protection Board (CFPB), was awarding regulatory fine money to activist groups as well. The CFPB is Senator Elizabeth Warren’s (D-MA) baby, structured by Obama and congressional Democrats to have no accountability to Congress and to be funded by assessments from the Federal Reserve. In 2017, the CFPB director appointed by Obama, Richard Cordray, tried to appoint his own successor to prevent Trump from naming one, resulting in a weird, months-long standoff maintained by the wannabe successor until she finally gave up and stepped aside a few days ago.
Trump’s interim appointee, Mick Mulvaney, has been working to limit the CFPB’s power to distribute fine money to activist groups. He has proposed changes in the CFPB’s charter to Congress, and in June, he fired the board that oversees the awarding of money from “civil penalties.”
These measures are all positive and encouraging. But the best news to date may be a ruling this past week by the U.S. Fifth Circuit Court of Appeals on a case brought by industry shareholders in Fannie Mae and Freddie Mac, the federal mortgage-guarantee giants. John-Michael Seibler has an excellent article about it at The Federalist.
The case was brought to challenge the unaccountable “independence” of the Fair Housing Finance Agency (FHFA), an entity created within the Treasury Department after the mortgage meltdown of 2008.
The FHFA is the agency that required Fannie and Freddie to forgo repayments to shareholders when their profitability recovered after the 2008 crisis. Instead of making the repayments – which they were supposed to do – the giant mortgage entities were directed to keep parking billions of dollars with the Treasury, in what were called “Net Worth Sweeps.”
From my September article:
[T]he Obama administration used Fannie and Freddie to generate a slush fund of prodigious proportions – to the tune of more than $240 billion – between 2012 and 2017.
This feat was accomplished by diverting profits from the mortgage-guarantee giants into the U.S. Treasury, instead of using them to pay dividends and reimburse contributors dragooned into propping up Fannie and Freddie in the 2008 financial crisis. The Obama administration kept Fannie and Freddie under conservatorship years past their date of certified restoration to health, and simply siphoned off billions into the Treasury in a process it called the Net Worth Sweep.
The purported reason was to protect Fannie and Freddie against future meltdowns. But the mortgage giants were profitable at that point, and needed only to be operated on a sound, accountable basis to be effectively protected. What Obama was really doing was retaining arbitrary control over profits that should have benefited Fannie and Freddie’s shareholders – many of which are pension and other investment funds in which hundreds of thousands of working-class Americans have an interest.
And as Seibler recounts, the FHFA got away with this for so long because of how its funding and powers were structured.
Congress…adopted some specific provisions that made the agency partisan and unaccountable to the president—unconstitutionally so, according to the 5th Circuit’s opinion.
Specifically, Congress authorized the president to appoint a single agency director for a five-year term who picks three deputy directors, and who would be removable by the president only “for cause.”
The Fair Housing Finance Agency does not get its money through the normal appropriations process, as other agencies typically do. Instead, it receives its operating expenses through an annual assessment of its “regulated entities.”
The last provision is similar to the insulated funding of the CFPB (in whose case the funding comes from the Federal Reserve).
The intent of these features may have been to reduce the FHFA’s political responsiveness across the board. I.e., it wouldn’t be only the president who had no real hammer over the FHFA director, once the director was appointed; it would be Congress as well. The director could appoint his own deputies, with no advice and consent from Congress, and had no need to apply to Congress for funding.
In theory, that would make it harder for interest groups to lobby (and bribe) Congress to favor biased mortgage-lending policies. It may have seemed like a good idea at the time.
But the structural provisions for the FHFA were exactly the things that enabled it to keep sweeping Fannie’s and Freddie’s profits into the Treasury – effectively creating an absolutely huge slush fund – instead of paying back the shareholders who were out hundreds of millions apiece from propping them up in the 2008 plan.
All Obama had to do was appoint the director of the FHFA, and then an Obama appointee had unchecked power to levy Net Worth Sweeps on Fannie and Freddie until his term of office expired. Congress had no means of intervening. (Obama’s first regular, full-term appointee was confirmed in December 2013 — under Harry Reid’s new non-filibuster rules, as a matter of fact — so his term expires in December 2018.)
And don’t forget: those shareholders awaiting repayment represent the mutual funds and pension plans in which millions of average Americans are invested. That’s who has been denied repayment by Fannie and Freddie, envisioned by Congress from the beginning.
Breaking the unaccountable power of the FHFA required challenging its structure in court. The Collins v. Mnuchin suit mounted that challenge, and that’s what the Fifth Circuit ruling gives us hope on. The Fifth Circuit opinion is that the FHFA’s structure is unconstitutional.
In this case, the court found that Congress insulated the Fair Housing Finance Agency too much from “meaningful executive oversight,” to the point that the president “could not fulfill his Article II responsibility to ensure the faithful execution of the nation’s laws, thus undermining the separation of powers.”
This is good news for a negative trend in agency structures across the board, and it’s good news for the specific case of the FHFA and its Net Worth Sweeps. It’s past time to cut this little agency down to size and make it accountable. It’s way past time to rectify the problem of using assessments and fines to create slush funds for the federal executive. The Fifth Circuit ruling on Collins v. Mnuchin will help Congress and President Trump do both.
It is unlikely (although I haven’t seen a statement on it) that “Mnuchin” – i.e., the Trump Treasury Department – will appeal the Fifth Circuit ruling. This is a win for integrity and accountability in government operation.
It was bolstered in June, in fact, by a ruling from a federal district judge that the unaccountable structure of the largely similar CFPB is also unconstitutional.
The trend in these exceptionally important but under-the-radar developments has thus turned positive almost overnight.
Regarding the FHFA, the obscure agency behind the biggest slush-fund stockpile of all, Seibler concludes with this obvious summation:
As a result, the president will soon be able to tell the agency’s director, “You’re fired.”