Even to a layperson, dismemberment does not heed the mandate of a conservator to restore the companies to sound condition and preserve their assets. Faced with litigation, the government is floating a new rationale -- that its actions would protect taxpayers. Certainly, alleged taxpayer protection will test better in focus groups. However, it is even more fundamentally at odds with the government's role as conservator.
The idea of conservatorship has been around for thousands of years. The ancient Greeks, Romans and English all understood that a conservator had fiduciary duties to protect the property of its ward. English law precedent from 700 years ago forms the basis of U.S. conservatorship law. Distilled, no conservator may take assets for its benefit, or to the detriment of the conservatee.
Notably, the conservatorship standard in the case of Fannie and Freddie comes verbatim from the Federal Deposit Insurance Act, which courts have interpreted as placing the FDIC in a fiduciary relationship with a bank under conservatorship. Since the FDIC was created in 1933, bank regulators have understood conservatorship to mandate a fiduciary duty to the entity in conservatorship. The conservator must act in the best interests of that entity.
By the FHFA's own admission and the government's newly concocted litigation rationale, the government's goal in stripping the companies of future profits was to fill the government's coffers while ushering in the demise of Fannie and Freddie. But despite its supposed intent to wind the companies down, the government is keeping them alive and stripping them of all of their capital. This is incompatible with both current law and millennia of conservatorship history.
While taxpayer protection may sound good, it does not relieve the FHFA of its legal obligations to place the companies in sound condition, preserve their assets, and restore them to normal operations. The FHFA itself argued in a 2013 lawsuit that stripping capital has left the GSEs "effectively balance-sheet insolvent, a textbook illustration of financial instability." As a result, taxpayers must continually support these entities. What should be immensely valuable warrants held by Treasury are rendered valueless.
The only lawful recourse at this point is to return to conservatorship law as it has existed traditionally.