Home / News / Government / FHFA Defends Paying $162M Legal Bill for Former GSE Execs
Print This Post Print This Post

FHFA Defends Paying $162M Legal Bill for Former GSE Execs

In late January it was revealed that taxpayers have spent more than $160 million defending former ""Fannie Mae"":http://www.fanniemae.com/ and ""Freddie Mac"":http://www.freddiemac.com/ executives in court, with $132 million of that money going to defend Fannie Mae executives.


This week at a congressional analysis hearing, members of several government agencies defended the spending, claiming a refusal to cover the court costs would have been illegal.

But the practice of advance payment of legal fees and indemnification of executives has been criticized, despite its apparent legality. The hearing also featured a testimony by the Honorable Mike DeWine, attorney general of Ohio.

His testimony condemned the use of taxpayer dollars to defend executives who, in his opinion defrauded the system and broke rules.

""What has happened prior to and since the federal government seized control of Fannie Mae nearly two and a half years ago is both outrageous and egregious. Simply put, Fannie Mae and its former executives, whom Fannie Mae has indemnified, have been using U.S. taxpayer dollars to pay their highly compensated cadre of lawyers to over-lawyer their indefensible actions,"" he said.

He continued, ""I am here today because what Fannie Mae currently is doing to U.S. taxpayers is wrong … Fannie Mae and its former senior officers have done considerable wrong and caused great harm to a great many…We already know that Fannie Mae cooked its books, smoothed its earnings (overstating them by $10.3 billion), and violated 30 generally accepted accounting principles -- nearly every major accounting rule applicable to it.""

But ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) acting director Edward DeMarco said covering legal costs of executives is one way the agency attracts skilled officers and directors, and ""fits within FHFA's goal of preserving and conserving assets.""

Furthermore, DeMarco stated, the FHFA pays the costs of legal fees that are tied to ""reasonable"" expenses, on the


condition that the party for whom funds are provided agrees to repay the funds if it is determined that indemnification does not apply to the matter.

In previous cases, courts have upheld this policy even in criminal cases, and the FHFA board of directors felt an effort to limit the payment of Fannie's legal fees would not have held up in court.

""The determination by FHFA not to interfere with indemnification and advancement of legal fees for former Fannie Mae executives was based on Fannie Mae's corporate bylaws, governing Delaware state law, the provisions of statute governing FHFA's oversight of Fannie Mae and court cases addressing such an action,"" his testimony read.

The testimony by Fannie Mae president Mike Williams reiterated DeMarcos statements.

According to Williams, Fannie Mae is obligated to advance certain legal expenses incurred by current and former officers, based on an article in the company bylaws and contracts the company's board has with each of its officers and directors.

""Since 2009, Fannie Mae has put in place a new board of directors and senior executive team. It would not have been possible for the company to recruit and retain these professionals without offering advancement protections and applying them consistently,"" his testimony read.

Texas representative Randy Neugebauer, however, sees things quite differently. Neugebauer requested full disclosure from FHFA in January regarding the legal fees of former Fannie executives Franklin Raines, Timothy Howard, and Leanne Spencer.

""The history of Fannie Mae under the management of Franklin Raines, Timothy Howard, and Leanne Spencer, is a story of abusing their positions to use the assets of the Enterprise to further their own interest and careers,"" Neugebauer said in a statement.

""I have discovered that the taxpayers have advanced $24.2 million in legal expenses for the defense of Mr. Raines, Mr. Howard and Ms. Spencer against civil suits accusing them of securities fraud. These three individuals who collectively earned over $150 million in total compensation from 1998 â€" 2003 are not just assured of indemnification, but are actually being advanced the funds, which means they have no expense in just running up the tab for the U.S. taxpayer,"" he continued.

Neugebauer says FHFA approved the payment of the legal expenses for the executive despite the fact that ""Fannie Mae bylaws clearly state that indemnification shall not apply to directors and officers who breach their duty of loyalty to shareholders and/or engages in intentional misconduct- two measures that Franklin Raines and his management team clearly violated.""

About Author: Joy Leopold


Check Also

FHA to Expand and Extend COVID-19 Mitigation Programs

Mortgage servicers can begin offering post-pandemic loss mitigation immediately, regardless of the cause of a borrower's delinquency.