the networks sweep is unlawful and must be enjoined for two independent reasons first the transaction violated here is clear a prohibition on treasury increasing its ownership stake in the companies after two thousand  and second f h f a by imposing a mandatory zero capital regime violated its own statutory commands to preserving conserve assets and restore them to soundness now with respect to treasury harry gave treasury temporary authority to purchase the company's stock and that authority expired in two thousand and nine why did it purchase the stock it changed the way it was going to get evidence well if we look at the economics of it your honor it is no different than if they purchased every single outstanding share of common stock and junior preferred stock in the sense of after the sweep they now get all the economic benefits that would have flowed to the junior preferred shareholder money to the treasury well if that's true that sounds like a takings claim why are we having this fight in the seventh circuit yes your honor with respect to our position is that under the a p a that if the court finds that it was unlawful that it shall be set aside and levin versus miller the court declined the government's invitation to a interpret a statute to impose a massive takings liability on the united states government and to answer the court's question about was this really a purchase sir not if we look at the government's own conduct your honor in this very case under seventeen nineteen g one b the government has to make certain findings whenever they do a purchase and they did those findings in the first amendment and in the other amendments even though in that instance two there wasn't a single additional share rather there was new economic value being created and if we look at their revenue ruling and we cite this in our case it's revenue ruling fifty six cash five six for that revenue ruling it involves a situation not unlike this where you have preferred stock and then it changes the liquidation preference of the preferred stock is increased him equal the entire net worth of the companies and the treasury department itself said that's an exchange that's a new security well it's interesting you're talking about the liquidation preference because actually even the first and the second  amendments had an effect on treasuries liquidation preference you know you're complaining that they were paying dividends and that they were using the other option which would go which would increase liquidation preference but i don't see why if you raced to do the second amendment on december twenty fourth two thousand and nine because they understood that the authority was going away so that they were but they were still talking about the dividends that they were going to get and what was happening of course was the ten percent things is fannie and freddie that point didn't have enough money to pay it so they kept borrowing more and there was a big spiral of debt that was going on ok so i think we're talking about two separate things your honor because with respect to treasur which is what i have been focusing on there is a clear temporal divide the court is asking about f h f a and its conduct and and this whole notion of a death spiral and with respect number one the complaint is crystal clear in this case that there was light was green you have to assume the light was green but i don't understand why something along those lines is simply to be accepted well and i understand the difference between adjudicated facts and i just i just facts and the more versus madigan case  your honor but this is plainly a new ticket in fact the question is whether these particular companies had sufficient earnings and ability to actually pay the dividends and whether in fact in the real world there was a problem with circular draws or whether it is a pretext as we maintain we see it as a pretext for two reasons number one under the p s p days there was an absolute right to elect to not pay th dividends and so there was never a threat of insolvency increasing the liquidation preference certainly in the end is a claim on the assets but it won there their argument about the desk by role and draw in the circular draws is that it imperilled the line of commitment their argument is we were doing these draws we did twenty six billion dollars worth of and that was a big problem because it imperilled the line of commitment so are you getting the twenty six from i remember this that there was first a cap of one hundred billion and then it got popped up to two hundred billion and then it got then the cap was taken off altogether and i guess what one of the fundamental problem i certainly share judge is your brooks opening question if this is really just nationalizing fannie and freddie and you have been and your clients have been compensated there's a forum for those kinds of claims but putting that to one side i was overwhelmed reading these briefs in the sense that you were taking an ex post viewpoint on this and at the time all of these arrangements were made it was not at all clear whether this the dividend that was due was going to be payable what you call the networked suite turned out to be favorable in some years not favorable in other years nobody knew people were making arrangements your honor with respect our complaint is replete with sworn deposition testimony with internal e mails from the government showing that they in fact knew they did a renewed push on august eighth of two thousand and twelve the c f o of fannie mae went in to meet with senior treasury officials and they asked you that deferred tax asset are you thinking of reversing it and she testified that she told them yes we are they said when she said twenty thirteen and all likelihood they said how much money will that be she said about fifty billion dollars that's ex ante and we have an email from that morning where the participants in that meeting said let's have a renewed push to get this done so that's ex ante it's also ex ante the fact that they could just do a payment in kind in increase the liquidation preference looking to the treasury's brief for the third amendment they note that by exchanging a fixed dividend for a variable one they accept more risk and so there's some years of course two thousand and thirteen and and fourteen where they get more than they thought but they say they received less in dividends and twenty fifteen and twenty sixteen then they would have hundred the original ten percent number so that it's numbers like that that made me think  well if you're going to focus only on the years in which it was in one direction that's doesn't seem right to me well your honor two things on a net basis of people could get to tally of all the years it's one hundred thirty billion dollars but the other point of this is it's different your honor every year is the same in this respect it was impossible for them to make less money under the third amendment impossible because in the in the regime prior to and let me explain why if i may  in the regime prior under the second amendment let's say the company has made five billion dollars in profits treasury would take all of the five billion it's true ask you about what's a profit by the way it seems to me it's at the end of each quarter correct that the cost that the net that that what you call the net worth sweeps happen yes you're ok so during the course of that quarter fannie and freddie are operating i assume as businesses they are paying money out they're getting money in their operating ordinarily correct yes you're all right so why i couldn't during the course of the quarter they pay down the liquidation preference for example of their not say your honor i can get you that puts particular side on rebuttal but they are not i believe all the parties agree that they are not allowed to pay down the liquidation preference without the approval of treasury  and going back to this idea of well the treasury accepted some risk what they say that's not true and i want is follow through on that while objects so within two thousand or the second amendment let's say in two thousand and eleven the companies made five billion dollars treasury would take all of that five billion dollars now it's our understanding it's true there would be a circular drawn on a net basis you know they pay themselves some dividends and borrow but on the net basis they get five billion dollars now under the third amendment if the companies make five billion dollars they still get at the difference the only economic difference is that under the third amendment if the companies make more than one thousand billion they get to cape keep it and we have their internal documents which we cite in the complaint where they were celebrating this and talking forty six seven if we have the question whether treasury has acted in ultra virus manner whether it has in fact operated under the powers it's given if there is conservator or  receiver or whether it's outside those powers otherwise there's no jurisdiction for us to do anything or no i should i don't want to say jurisdiction there's no the statute doesn't create a claim so so your honor judge brown on the d c circuit agree with the dissenting judge right now but she agreed with the point to that motive is irrelevant and she still found that f h f a have you were just making a motive and if we could delete that in say both sides that well it makes no difference i'd be perfectly happy we agree that if the court only looks at a fact we win and the reason is because the effect of what they have done is imposed a mandatory zero capital regime director walk him self has testified that it is especially irresponsible to run these two huge financial institutions with zero capital sound to dance at forty so what what about this year that's why i asked about actual operations if if this operates on the net amount of money at the end of each quarter after these organizations have conducted their business in the ordinary course of business why does it hurt them to have why does it impede their ability to do business if the amount of money at the end of the quarter is greater or lesser director want testified that it every business needs to have capital to for the vicissitudes of the business cycle that you have that and that's why throughout financial institutions howard were fannie and freddie hurt by this system other than by not paying dividends to your clients which which is not an injury to them it's an injury to your clients that they were hurt by having zero capital it is man why they're saying that but i don't understand why i'm not saying a congress is saying a congress says soundness it has to be operated in a sound manner and forty five said it's not operating capital number two the p s p a's do not treat that line of commitment as capital and number three the network suite exposes that line of commitment to maximum vulnerability in the absence of the sweep there would be one hundred and thirty billion dollars of capital standing between losses and having to draw on the line of commitment now because all of that profit is off the balance sheet and they're operating in capital world the first star of last comes out of the line of commitment in the absence of the sweep there'd be a hundred and thirty billion dollars on the balance sheet to absorb those losses and so when congress said that  south of the f h f a has to operate and is sound and solvent manner it was referencing capital we see that in the regulations we see that in itself forty five thirteen says soundness means maintaining proper capital with respect i'd like to go back to this our maybe you could talk for a minute about why your clients have a right to bring this is a direct action well your honor first of all we under were hard because they don't have capital we were hurt because all of the economic value associated with our shares were taken away and it doesn't affect all shareholders equally one shareholder the united states treasury is benefiting and was able to isn't this one of those situations though where in order to decide whether we can decide i as i said i think probably more with this states a claim that to the extent it matters we do need to see back door that comes pretty close to having to decide the whole merits of the case just to decide whether we can decide the case right your honor the question whether it acted beyond the scope of its conservative powers right and effectively that's the whole  dividend sideroad as opposed to some other number some other system yes that you honor and i think there's a point that's very important that your honor has already alluded to and i want to make this clear up front between two thousand and eight in two thousand and twelve treasury committed four hundred forty five billion dollars to the jesses that is to cover any time their net worth for falls below zero thus ensuring they never become insolvent the jesses have drawn one hundred ninety billion dollars from that commitment roughly between two thousand and two thousand and twelve but that has business for the last five and a half years since the third amendment is that commitment that gives the market confidence that they will remain in business it is that commitment that has you know that assures that they will be around for the foreseeable future so let me put it this way  your opponent has had a minimum suggested an alternative way that the markets could have had confidence post two thousand and twelve and that's by letting them keep their own or decide i'm not sure they would have kept every penny they maybe th paid something out in dividends to all their stockholders but you know he was throwing around you know one hundred twenty six billion dollars as a number of other number called a hundred billion if you want that would be another way to have confidence in the companies and i guess the question is that are you forced to do it that way are you allowed to do it with putting the credit of the united states behind them well precisely your honor i mean it's you know fundamentally at root plaintiff's claims art this could have been a double dip done a different way but that goes to the business judgment of think it could have been done a different way as your honor points out but that is fundamentally a business decision by f i f a as conservator in the position of how do you ensure that these systemically important entities remain in operation for the foreseeable future and that is protected by forty six entirely of federal law or does i realize that the companies for internal affairs have chosen the laws in their bylaws of various of delaware and for ginia right that's correct but it is you know of course a federal statute and federal law applies obviously as your point in order to brief particular with respect to the director richard claim issue federal law often looks to state law on those issues but i think at least on those issues the state and federal law is in accord with what qualifies as a direct claim versus a derivative claim and as your honor suggested earlier these are quintessentially derivative claims they allege a harm to the company and they seek relief the unwinding of the third amendment that would flow to the companies not directly to the shareholders and regulating the entities f h if a also serves as a regulator and is subject to in most cases with some exceptions a p ever view of their actions as a regulator so in cases like leon county in sonoma county that was in the ninth circuit in the eleventh circuit there was the allegation that you're acting as a ok and i guess the last question is maybe a version of that of the first question if in fact the treasury has made itself the owner of every last penny of net worth why wasn't this a purchase of the stock at a time after that power had expired yes you are in with respect just for one second of course argument is that forty six seventeen f bars acquiring new shares and i think it is on that front important again to remember the purpose of the intent behind the purchase provision in the first place that was to allow the treasury to provide taxpayer dollars to prop up the g s ease in two thousand and eight when they were when they were in a precarious financial situation and then obviously congress i think has the surrounding provisions indicate was concerned about protecting taxpayer dollars and insuring so it it it placed the too poor a limit on how long treasury could do that and here we have an example where treasury did not commit any did not commit any additional funds and this was simply a contract amendment and modification to the underlying fixed given obligation to change it to a variable one and that's all we have here your honor in terms of no further questions fine thank plaintiffs are not happy with the original contract from two thousand and eight they don't like the structure that was set up that they don't like the fact that pursuant to authority granted to treasury express the way capital is typically evaluated the capital in the bank instead as has been indicated the director looked at how large is the treasury commitment is that a large enough to satisfy the purposes of capital is it large enough to keep the markets happy and over time that was increased but the important point was from day one in two thousand and eight way behind the statue of limitations your honour's as have pointed out in both groups from day one it was not set up that the conservatorship that capital would be maintained at some type of regulatory minimum and it was set up that way because the purpose of the commitment was to assure that no at no time were the institutions which treasury would f h if they be required to place them into mandatory receivership and close them down because again as a court knows these are just plain vanilla national banks or state charge banks these are financial institutions but congress chartered them as part of a greater purpose that greater purpose was to the silicate to enable to enhance the operation of the national mortgage markets and that that was the key purpose of these enterprises so when this capital when treasury made this massive investment and i emphasize it's only by the grace of the continuation of this massive investment today over a quarter of a trillion dollars that these enterprises remain operational the relief sought by plaintiffs would set aside justin recreate catholic on this i would say magnificent magnificent oversight effort to assure the operation of these enterprises apparently you think very poorly of bankruptcy judges and lots of businesses that go underwater continue an operation if they have value in their future operations they are recapitalized and continue your your assertions just deny that that process exists i don't think you need to make assertions like that in order to prevail in this case but if your argument depends on them you've got a large world of experience in finance again you your honor i respect that i don't disagree with the court's comment use it to to create a different solution that congress for reasons best known to itself didn't want at least in two thousand and eight the bankruptcy process john told it could change its mind it at f a or somebody else to put an end to this system in which we have the the net worth at the end of each quarter being paid over to treasury i mean we're just doing this forever as this is a mitt amended it provides that for example the periodic commitment the will be relinquished will not be required for so long as the  new dividend structure remains in place so it in that language i believe that contemplates the possibility of further amendments tomorrow or down the road but that might restore there's just commerce commission did last a hundred before it was replaced by another identical agency with a different surface transportation right so yes so so that we have this temporary permanent or permanent temporary situation and all i was going to do was ask what you think the term conservatorship means your opponents have said that that means you've got to sort of give the companies the best boost possible  in what sense do you think you're running a conservatorship whether reference to solve and see i believe you are means that it stays technically solvent over zero so that now be placed into receivership under the assure or enable the operation of these enterprises until such time as a receivership is imposed or i to totally conservatorship and for the temporary period of the conservatorship the whole point of being the purpose of existence for the conservator is to facilitate to enable these enterprises to operate now extending the fact that without the treasury in this case support they would be unable to operate at all so so they've been conserved in the sense if they're put in a position to continue doing business in the market of the sort that congress wants them to do to keep the national mortgage of purpose and intent no that is relevant the only issue for the lower court and i respect to split this court is did the f h a exercise a power authorized by treasury even though of course it only talks about f h a f a with all respect to treasury we would say that is both wrong and irrelevant it's wrong because congress was very clear that it wanted the courts to enjoin violations of  a which is the beneficiary of the anti injunction provision is it meant that it can be enjoined if it violates harrah's so there's no reason to think that treasury would somehow be in a better position even though they didn't get an anti injunction provision but as long as  them think they've violated here of course because that the general powers of the agency is conservator or receiver forty six seventeen b are quite broad but your honor their position is that tomorrow they could walk the treasury could walk into f h f a and say we'd like to buy a thousand shares of faith that would be a new case that it's not the but that's their position that is their position and your honor judge chang cut right through that and said it's irrelevant because he said what is what is alleged here is that treasury and f h f a entered into an agreement to violate terra by purchasing shares out of time that's our position and when that when the agency is conservator takes over collects money forms functions and whatever why does that mean the agency is forbidden from talking to its counterparty most of the team think agreement makes it bad no a person agreement to purchase out of time is what makes a guy that's not what we that's not what we have here well under their revenue ruling fifty six dash five six for the treasury department tells taxpayers on a transaction just like this one that's a sale but that's an exchange but you have the whole section of your with quite a few analogies but this statute needs to be read for itself right well i don't think they have never going to step in rulings are well known and it is here and there are regulations and and security so they have not pointed to any body of law which exults form over substance like this and here's the point i was trying to make your honor which is under para one there is a purchase certain determinations need to be made this is under seventeen nineteen g one b they have to if there is a purchase treasury needs to make it to try to make that point earlier and earlier there were no shares that were added and they made that determination we see that on page eighty nine of the appendix and so treasur statute anything any time treasury after december thirty one two thousand think rhys's it's equity ownership stake and then i thought it didn't do that what it did was it took all the benefit from from the shares i mean i suppose if you just said you know you used to owe us you know a certain amount of money each quarter now we're going to double it would that be subject to your same arguments that that would that might be problematic we'd have to look at the effect of it but it would be different from f h f a's perspective in it in one key respect is it would not be a zero capital regime it would be a problem for treasury treasuries increasing it economic stake in the companies congress was very clear that they wanted a temporal limit on the ability of the united states government to buy more equity to increase their equity stake in these companies you've made that point repeatedly and i guess the question is is that a fair characterization or in fact is the alternative characterization that they're offering a better match for the various powers they have as conservator as conservators they can carry on the business they can do all sorts of things i don't know that has anything to do with how many shares they have so f h f a has authority to carry on the business treasury doesn't have any authority to carry on the business they've already has underwritten  the business yes and they could do that underwriting up until they could increase their equity stake up until the sunset if i may in my remaining moment so they f h if a said solvency they said nothing about soundness on solvency they told the