Fannie Mae head defends millions in legal fees

The hearing, hosted by the House Financial Services Committee’s oversight subcommittee, came about after details emerged of more than $160 million in legal fees spent by the GSEs defending themselves and former executives, including former CEO Franklin Raines, who left Fannie in 2004 in the midst of an accounting scandal.

“Unfortunately, today, years after they were forced out of the company for their misdeeds, Franklin Raines and his management team have continued their abuse,” said Rep. Randy Neugebauer (R-Texas), chairman of the subcommittee. “This time however, it is against the U.S. taxpayers.”

Fannie and Freddie have been at the center of controversy since the financial crisis began, with Republicans placing a large amount of the blame for the fallout on the GSEs’ shoulders. It also comes at a time of debate about the future of the entities. The Obama administration has joined several Republicans in proposing a winding down of Fannie and Freddie.

While he acknowledged it was Fannie’s responsibility to ensure legal resources are managed effectively, Williams said Fannie is obligated to pay those fees by its bylaws, and that such policies exist in other private corporations.

But Mike DeWine, Ohio’s attorney general, alleged that Fannie was being anything but cautious in managing its resources. DeWine, a Republican, is currently representing Ohio public employees and teachers in a class action fraud suit against Fannie.

In his testimony, DeWine accused Fannie of dragging out the suit over six years, relying on an arsenal of lawyers to  “delay and stall, all while racking up astronomical legal costs and sticking America’s taxpayers with the bill.”

“I fully understand an argument can be made that Fannie Mae has to defend itself and its former senior officers, but the amount they are spending — at the expense of U.S. taxpayers — is, in a word, ridiculous,” he added.

Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie Mac, also defended Fannie’s policy. Protecting executives from lawsuits helps attract and retain top quality workers, and overturning existing policies would be “inconsistent with standard business practice.”

After Fannie and Freddie were placed under federal conservatorship in 2008, it was crucial to retain experienced talent, and covering legal fees was part of that equation, he said in his prepared testimony.

“It was important to avoid losing personnel who could help reduce the costs to the taxpayer from their large portfolios and business activities and who could be distracted by an absence or potential absence of indemnification,” he said.

In addition, if Fannie and Freddie changed their policy on covering legal fees after the fact, it could lead to more costly litigation, as people hired with that policy in place could challenge in court its revocation.

“FHFA believed that continued advancement of funds was in line with the conservatorship and that actions to interfere would be counterproductive due to the ability of individuals denied to sue the agency for such actions,” he said.