(Bloomberg Opinion) -- It’s not often that hedge funds and the Constitution come up in the same sentence — let alone the same judicial opinion. But the two are very much in play in an important opinion issued by the U.S. Court of Appeals for the Fifth Circuit.

In it, the court handed a win to hedge funds that are challenging the 2012 decision by the Federal Housing Finance Agency to make Fannie Mae and Freddie Mac transfer their profits to the U.S. Treasury in perpetuity — a transformation of those previously quasi-private entities known as the net worth sweep.

At the same time, the court also held that it was unconstitutional for Congress to make the head of the FHFA removable by the president only for cause.

These two separate parts of the court’s decision are independently important. Both or one or neither could eventually reach the Supreme Court.

One is based on the interpretation of the statutes creating the FHFA. The other is based on the Constitution. In principle, you could be interested in one and ignore the other.

But that would be a grave mistake. What’s most interesting about these two parts of the opinion is that they are ideologically connected, even if they are on the surface legally independent.

Both parts reflect the rise of a strand of conservative judicial thought that questions the very foundations of the administrative state — and thus of agencies like the FHFA. The judges who subscribe to this approach are inclined to limit the powers of agencies to make substantive policy decisions like the net worth sweep, which fundamentally changed the character of Fannie Mae and Freddie Mac. The very same judges, following the same approach, also oppose agency independence of the kind that Congress creates when it makes an agency head removable only for cause.

This trend is something you need to be aware of whether you’re someone who makes a living trading in regulated markets or someone who cares about how the courts are re-configuring the constitutional structure of the administrative state.

To explain the connection between the two parts of the case, let me briefly simplify (or really, oversimplify) what the appeals court did.

With respect to the net worth sweep, the court said that the FHFA’s statutory powers as receiver and conservator of Fannie Mae and Freddie Mac did not authorize the agency to transfer substantially all the capital of the two entities into the Treasury. In essence, the court said, it was lawful for the FHFA to bail out the two government-sponsored enterprises, and lawful for Treasury to take a hefty fee for doing so. But the net worth sweep, the court said, was really a liquidation of Fannie Mae and Freddie Mac’s assets -- and that liquidation went beyond the powers granted by Congress.

To reach this conclusion required an extremely cramped and narrow reading of the statutes that created the FHFA. Several other courts of appeal have rejected challenges to FHFA authority based on analogous arguments. By its own account, the Fifth Circuit has now created a split with at least two of the circuits. Such circuit splits can eventually lead to the Supreme Court weighing in to decide the issue.

What seems to have motivated the court is that the net worth sweep amounted to a serious policy decision about the future of Fannie Mae and Freddie Mac. The court reasoned that the point of the net worth sweep was to block the possibility that Fannie and Freddie could ever go private again. In the court’s telling, this policy goal wasn’t consistent with the FHFA’s powers.

But under traditional administrative law principles, agency powers to make substantive policy decisions are typically treated with significant deference by the courts.  If the FHFA is a receiver and a conservator for Fannie and Freddie, that would ordinarily be enough to let it make major, permanent changes to their structure and business model.

In short, what motivated the Fifth Circuit’s ruling on the net worth sweep was a revisionist, conservative theory of administrative law — one that seeks to interpret agencies’ authorities much more narrowly than in the past.

That same ideological turn with respect to the administrative state was also more obviously visible in the court’s constitutional ruling about whether Congress can make the FHFA an independent agency by protecting its director from presidential removal except for cause. Without getting into the constitutional precedent, the gist is that until now, the Supreme Court has been willing to uphold the creation of so-called independent agencies, run by heads who are appointed by the president but who cannot be removed except for cause.

The Fifth Circuit said that the FHFA enjoyed a “unique constellation of insulating features” that made its independence a violation of the separation of powers. This was based on a highly dubious interpretation of a 2010 Supreme Court opinion, Free Enterprise Fund  v. Public Company Accounting Oversight Board.

Essentially, the Fifth Circuit was making new constitutional law to the effect that an independent agency can’t be too independent. Again, this view creates a split between different appeals courts, and may have to go to the Supreme Court for resolution.

The ideological basis for this attack on independent agencies is grounded in the idea that the Framers’ three-branch structure of government can’t be expanded to include independent agencies, which the conservatives like to call a “headless fourth branch” that is not accountable to voters. Justice Neil Gorsuch is leading the push for a rollback of administrative structures like independent agencies that he considers unconstitutional. There’s a lively and growing debate among scholars of administrative and constitutional law about how far Gorsuch can take the counter-revolution against the administrative state.

The takeaway from the Fifth Circuit opinion is that this isn’t just some abstract debate among scholars about the future of constitutional law. It’s a debate whose gravitational pull extends to big-ticket litigation brought by hedge funds making predictions that are linked to its outcome. It represents that rarest of situations: when you can trade on the meaning of the Constitution.

To contact the author of this story: Noah Feldman at nfeldman7@bloomberg.net

To contact the editor responsible for this story: Sarah Green Carmichael at sgreencarmic@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Feldman is a Bloomberg Opinion columnist. He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”

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