Don’t Break Them, Take Them: The Legal Battle To Nationalize Banks

Mexican labor leader, internationalist, and Marxist Toledano who advocated for the nationalization of the oil industry in 1938.

As if the Western media did not have enough reasons to rally behind the right wing terrorists of the Venezuelan opposition protests, a great outcry arose from the powers that be when Venezuelan Minister of the Economy Ramon Lobo and the unions seized control of a General Motors factory to ensure that production halts are not used to further harm the already fragile economy. GM of course was not please about this development and ran to their imperialist US government for help – after all, these political friends tend to give them far more deference. Unfortunately for the auto manufacturer giant, Venezuela does not take kindly to such interventionist appeals, so GM’s assets were frozen. It should be noted that this was not some impulsive move solely stemming from the recent unrest: GM owes more than $665 million in damages to a local car dealership that is over 16 years delinquent. The Western media will of course ignore this fact despite that such an egregious violation of the law would probably even elicit an injunction from the capitalist courts of the US. Instead the focus is on nationalization, a word that conservatives and liberals alike have tried to make into a slur, especially in response to any attempts to condition the recent bailouts of the auto industry and banks on even lukewarm reforms.


Part of the fear of nationalization stems from its long history as a tool of national self-determination for formerly colonized countries, which is why even the more right wing countries of the Global South tend to have some amount of the industry nationalized. Privatizing those industries has been the largest focus of capitalists since Cuba secured its independence in 1959. This racialized, “restless natives” fear of nationalization has infected the concept itself.

But there is also particular anxieties about nationalization in Western countries, especially with the rise of austerity as the de facto truth. The cost of nationalization obviously varies depending on the scope of the industry, whether it will continue providing the same level of services or even expand them, and many other factors. But cost, despite the gripes of so-called fiscal conservatives, is not actually the main reason capitalists are so strongly against nationalization. Nationalization necessarily disrupts the private accumulation of capital, not just in the industry in question but in the intersecting industries. For example, a nationalized healthcare system would likely impose some amount of price controls on drug and medical device manufacturers And it is even more disruptive on a political level, demonstrating that certain industries or services can be run in a way other than for the private accumulation of capital. The fiction of inevitable or “natural” capitalism falls apart.

The problem of course is that the “free” market doesn’t function without the support of a state apparatus, which I have discussed on this blog over and over and over again. Most actual capitalists (as opposed to the politicians and zealots lost in a fantasy of government-less capitalism) recognize this, so the question becomes how to facilitate that backing without placing their control, and thus the future accumulation of capital, in jeopardy. These battles take place at every stage of an economic crisis (a convenient focal point for studying the relationship between the market and the state). The bankers have just as much, if not more, input into their own bailouts as the politicians who supposedly are writing them. Then, any regulatory compromises are delayed for as long as possible (the Dodd-Frank Act is a great example of this). This delay gives groups like the National Association of Manufacturers (NAM) time to climb the ladder of appeals in court to obtain federal rulings to mitigate, if not stop outright, the regulations. And of course they always try to have the regulatory compromises put in the form of executive agency regulations that can easily be thrown out later.

However, even with the ability to stack the deck so thoroughly, the capitalists occasionally underestimate the potential of a compromise to their own detriment. The Consumer Financial Protection Bureau (CFPB) was an example of this, which is part of the reason why finance has gone so hard after it in the past few years – had they known how broadly the CFPB would apply unfair deceptive acts and practices (UDAAP), it would never have gotten past them in the first place so they are making up for lost time. But another mistake may be even more costly and frightening because of the specter of nationalization: the Department of Justice profit sweep of Fannie Mae and Freddie Mac.

Fannie Mae was created by the government in 1938 and Freddie Mac was created by the government in 1970. Fannie Mae was created in reaction to the credit crunch of the Great Depression – it expands the secondary mortgage market by creating mortgage-backed securities (MBS). In 1968, on the eve of the neoliberalism period, Fannie Mae split into two and privatized. As a private entity, it needed competition, so the government created Freddie Mac (which had an almost identical charter). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 cut the residual ties Freddie Mac had to government control. Towards the end of the Clinton administration, then-HUD secretary Andrew Cuomo started pressuring Fannie and Freddie to increase loans to low-income communities by providing more subprime loans. In 2004, the last regulations preventing predatory housing loans were stripped away – not that it mattered too much as the bubble was well on its way to bursting at that point.

Because the Great Recession was triggered by the subprime mortgage crisis and credit-default swaps, a type of insurance on MBS risk, was at the heart of it, Fannie and Freddie were placed under public scrutiny. By the summer of 2008, the government was considering drastic action as the two mortgage giants went into market free fall, with shares down 90% in one year. That meant that half of the entire mortgage industry, about $6 trillion in assets, was at risk. So in September 2008, the Federal Housing Finance Agency (FHFA) placed Fannie and Freddie under conservatorship.

This conservatorship was, in the words of Professor Alan White, “essentially nationaliz[ation].” Alan White, Banks As Utilities, 90 Tul. L. Rev. 1241, 1243 (June 2016). But because of the enormous stigma against nationalization, Fannie and Freddie have remained “nominally shareholder-owned and regulated by a separate federal agency.” Id. The FHFA was clear when the conservatorship was announced that there were no plans to liquidate the companies and, in-line with the TARP bailouts and other crisis legislation, was thought to be a temporary measure until Fannie and Freddie regained the financial stability needed to regain profitability. But in 2013, an agreement was reached between Fannie and Freddie and the Treasury Department to “sweep” the profits of the mortgage giants into the government. And before long, more profits had been “swept” in this way than the federal government had spent on bailing out the companies.

Fannie and Freddie were accidentally nationalized. Right when they were about to be freed from conservatorship, everyone’s favorite Republican Senator rambled his way into shutting down the federal government. Again, actual capitalists realize that the government is needed so there was panic about how to maintain the normal functions of the market while the Tea Party rubes had their temper tantrums. The Treasury Department had already bought a majority holding in Fannie and Freddie as part of the conservatorship, so they used this cover to enact the profit sweep. And despite some promises to the contrary, the Treasury Department has yet to terminate this agreement.

A flurry of litigation has been unleashed against this agreement by the shareholders of Fannie and Freddie who are not receiving dividends because of the profit sweep. Most of these cases have stalled or been defeated – the fate of the conservatorship now depends on the Pagliara v. Federal National Mortgage Association case, which is currently awaiting rulings on discovery motions and a motion to dismiss that could provide some juicy legal drama in the next few months.

These lawsuits were premised on contract common law – quite simply that as shareholders they had entered into an agreement to receive dividends when available and the profit sweep constituted a breach of the agreement. The lawsuits aside from Pagliara were mostly dismissed for procedural reasons, but some of the judges seemed at least somewhat dismissive of the contract arguments. After all, Fannie and Freddie practically begged for the conservatorship and the shareholders were not complaining when the value of their shares were saved from oblivion. Their non est factum argument rings hollow when they failed to oppose the conservatorship initially and there is the further hurdle of the firms being Government Sponsored Enterprises (GSE) that, while privately controlled, ultimately do not have the full extent of “rights” that other companies do. That being said, this may not have been the case had more time passed or if the Treasury Department outright announced that the arrangement was permanent, as they would of course do in a true nationalization.

Thus we come to the major quandary of nationalization in the US legal system. True nationalization would almost assuredly breach the shareholder agreements of a company. Generally contract breaches are remedied by money damages but, if these Fannie and Freddie cases are any indication, investors are scared enough of nationalization to turn activist and pour more money into defending their “rights” than the shares are even worth. Of course even in this instance, investors are capitalists and would likely settle for the right price. In the case of Fannie and Freddie, where the Treasury already held 79% of the shares, this could be a manageable buyout. But for companies that are not government-sponsored entities, such as the Big Four, it would require significant budgetary allocations even greater than the TARP program.

As I have mentioned in previous posts, the Federal Reserve does have some special powers to “break up” the banks and hypothetically the liquidated assets could be directed to some federal agency (likely the Treasury). But the conditions for this break up to occur are thus far entirely hypothetical and the power itself could soon be taken by the CHOICE Act.

So is there no hope for advocates of nationalization? Not quite. First off, the GSEs like Fannie and Freddie could be a good place to start. It is clear to everyone that the neoliberal notions of deregulated competitive-but-government-insured firms simply do not work. And it is easier to justify politically: taxpayer dollars are what keep these firms running, so why are they controlled by a handful of people rather than a democratic process?

As to the nationalization of entirely private enterprises, let’s return to the example of Venezuela. In 1999, by national referendum, Venezuela adopted a new constitution that ushered in the Fifth Republic. It is one of the most complicated and extensive constitutions in the world, guaranteeing a plethora of human rights to indigenous people, people of color, and women. However I want to turn to Title VI whereby Venezuela radically altered its economy.

Detractors from the Left will likely point to the support of “free competition” in Article 299. I will not pretend that I agree with this provision’s inclusion, but nevertheless the document as a whole still adopts ambitious, socialist goals of development. Article 299 itself for all its pandering to capitalism makes it very clear that it is the State, not private enterprise, that has the final say over Venezuela’s economic destiny. And the article clearly sets out the priorities of this economy, none of which are profit: (1) creating jobs (2) raising the standard of living (3) ensuring economic sovereignty, and (4) “ensur[ing] a just distribution of wealth through participatory democratic strategic planning with open consultation.”

There is also the infamous Article 302 and 303 constitutionally enshrining the nationalization of the oil industry, and the less well known Article 304 protecting water from privatization and Article 309 protecting Venezuela craft and folk. But it will probably surprise no one that I consider the most positive part of this section to be Article 308, which enshrines the State’s protection of cooperative enterprise.

Ultimately similar constitutional changes would be necessary to seriously tackle any efforts at nationalization in the United States. In 2017, the necessary Constitutional Convention for doing so is seeming more realistic, although not only for the Left but for a dystopian Right agenda as well (gotta love how both the linked articles have that same, boring picture of the “Founding Fathers”). It is crucial for the Left to not only push for a Constitutional Convention serving as a vehicle for our agenda but to disrupt and fight any attempt by the Right to do the same. The odds are against us with enormous organizations like ALEC bankrolling the opposition, but the odds are always against us, and we only win by fighting just the same.

Some of my comrades probably feel like a Constitutional Convention is not a revolutionary or socialists goal – that the only way forward is a violent revolution. As an officer of the court I of course cannot and would not advocate for violent revolution. That being said, any endeavor to radically rewrite the Constitution to promote socialism in the current political climate is almost guaranteed to provoke massive unrest on both sides. The advocates of a “peaceful transition” to socialism may never get the opportunity if armed self-defense becomes necessary in the resulting chaos.

Even if a Constitutional Convention establishes a new socialist Constitution, that would hardly be the end of the struggle. Even with the fundamental law of the land altered, the Right will fight it both legally and illegally as they are doing right now in Venezuela. And like the comuneros and Marxists of that country, we must always push forward to more human rights, more worker control, and the abolition of private property.

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