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After the Deal: Fannie, Freddie and the Financial Crisis Aftermath

56 Pages Posted: 15 Aug 2014 Last revised: 9 Mar 2015

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

David T. Zaring

University of Pennsylvania - Legal Studies Department

Date Written: August 20, 2014

Abstract

The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.

Keywords: Financial Crisis, Regulation by Deal, Administrative Procedures Act, Government Takings, Fannie Mae, Freddie Mac

Suggested Citation

Davidoff Solomon, Steven and Zaring, David T., After the Deal: Fannie, Freddie and the Financial Crisis Aftermath (August 20, 2014). Boston University Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2480835

Steven Davidoff Solomon (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

David T. Zaring

University of Pennsylvania - Legal Studies Department ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States

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