February 15, 2011 – (RealEstateRama) — Since September 7, 2008 the U.S. taxpayers have sunk $153 billion into Fannie Mae (OTC: FNMAM) and Freddie Mac (NYSE: FRE-PWD). And according to Federal Housing Finance Agency (FHFA) the final tab could be as high as $363 billion! As if the news couldn’t get any worse for the American people, an investigation undertaken by this Subcommittee has discovered that the taxpayers have spent more than $162 million defending Fannie, Freddie and their former top executives in civil lawsuits accusing them of fraud. This includes over tens of millions dollars for former executives who knowingly and purposefully manipulated earnings to increase their own compensation, and whose actions directly contributed to the demise of the GSEs.
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. The abuse by these individuals was so far ranging that Fannie was forced to restate its earning by over $10 billion, which was followed by a $400 million settlement with SEC and OFHEO, and losses of tens of billions of dollars in market capitalization for Fannie Shareholders. Unfortunately, today, years after they were forced out of the company for their misdeeds, Franklin Raines and his management team have continued their abuse. This time however, it is against the U.S. taxpayers.
As a result of my inquiries, 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 – 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. Moreover, their attorneys have every incentive to keep the case going for as long as possible to maximize their fees, which are already in the tens of millions of dollars. One case in particular has been ongoing since 2004 and has included over 120 fact depositions, various expert depositions and millions of discovery documents. Unfortunately, no end is in sight.
This open-ended taxpayer commitment was approved by FHFA, the very entity that has an obligation to conserve the assets of the GSEs in such a way to minimize taxpayer exposure. It was approved even though 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. It is also worth noting that under Section 4617 of the Housing and Economic Recovery Act of 2008 (HERA), FHFA has the power to repudiate the indemnification agreements for these individuals.
With all of that being said; even if FHFA still feels obligated to advance legal expenses for Mr. Raines, Mr. Howard and Ms. Spencer, the contracts state that they are entitled to the advancement of “reasonable” legal fees. I think all of my colleagues can agree that these fees are not “reasonable” given the mounting taxpayer exposure, the delay tactics of the defendants, and the fact that many of these securities-related lawsuits have no end in sight.
One thing I feel very strongly about is that this Subcommittee needs to do everything we can to minimize further taxpayer exposure associated with Fannie Mae and Freddie Mac. I would like to work with Mr. DeMarco and FHFA to make sure they are equipped with all of the tools necessary to carry out this objective.
In closing, I would like to state that this particular topic has raised many more questions about the continuing operations of the GSEs and accordingly this will more than likely be the first of many hearings regarding taxpayer exposure to the GSEs. Along those lines, I also look forward to working with Chairman Bachus and Chairman Garrett to take a serious look at whether conservatorship of the GSEs is the best structure to protect U.S. taxpayers.