Taxpayers Foot Legal Bills For Fannie Mae, Freddie Mac

Following the 2008 takeover of mortgage giants Fannie Mae and Freddie Mac by the federal government, lawsuits accusing the companies of fraud have been growing by the minute. And it’s taxpayers who are footing the now $160-million legal bill to defend the firms and their former executives against those lawsuits.

As reported Jan. 24 by the New York Times, the majority of costs – $132 million – has gone to defend Fannie Mae and various executives in securities lawsuits and government investigations related to accounting irregularities, bad investments and poor management decisions that occurred years before the mortgage crisis came to bear.

According to the New York Times article, taxpayers have so far paid more than $24 million to law firms defending three of Fannie Mae’s former top executives. Those executives include Franklin Raines, former chief executive; Timothy Howard, former chief financial officer; and Leanne Spencer, a former controller.

In addition to the $160 million in taxpayer money, Fannie Mae and Freddie Mac spent millions of dollars to defend former executives and directors before the government takeover. For Freddie Mac, the total is more than $27 million. Expenses are significantly larger at Fannie Mae.

Prior to the government’s takeover of Fannie Mae and Freddie Mae, a number of questions had begun to appear regarding accounting irregularities at both companies. Once those improprieties became fact, shareholders of Fannie Mae and Freddie Mac began to file lawsuits and arbitration claims as they tried to recover the stock losses they suffered.

Says the New York Times:

Richard S. Carnell, an associate professor at Fordham University Law School who was an assistant secretary of the Treasury for financial institutions during the 1990s, questions why Mr. Raines, Mr. Howard and others, given their conduct detailed in the Housing Enterprise Oversight report, are being held harmless by the government and receiving payment of legal bills as a result.

“Their duty of loyalty required them to put shareholders’ interests ahead of their own personal interests,” Mr. Carnell said. “Had they cared about the shareholders, they would not have staked Fannie’s reputation on dubious accounting. They defied their duty of loyalty and served themselves. At a moral level, they don’t deserve indemnification, much less payment of such princely sums.”

Asked why it has not cut off funding for these mounting legal bills, Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, said: “I understand the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees. It is my responsibility to follow applicable federal and state law. Consequently, on the advice of counsel, I have concluded that the advancement of such fees is in the best interest of the conservatorship.”

The Treasury Department is required to develop a plan regarding the future of Fannie Mae and Freddie Mac by the end of this month. But it’s likely the deadline will not be met, according to an Obama administration official.

Until then, legal payments – courtesy of U.S. taxpayers – to defend the firms and their former executives against pending lawsuits show no sign of going away.